UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
TO
FORM 20-F
(Mark One)
☐ | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| OR |
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the fiscal year ended December 31, 2023 |
| OR |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| OR |
☐ | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| |
Date of event requiring this shell company report. . . . . . . . . . . . . . . . . . . | |
| |
For the transition period from to to | |
Commission file number: 001-38652
X Financial
(Exact name of Registrant as specified in its charter)
N/A
(Translation of Registrant’s name into English)
Cayman Islands
(Jurisdiction of incorporation or organization)
7-8F, Block A, Aerospace Science and Technology Plaza
No. 168, Haide Third Avenue, Nanshan District
Shenzhen, 518067, the People’s Republic of China
(Address of principal executive offices)
Mr. Frank Fuya Zheng, Chief Financial Officer
7-8F, Block A, Aerospace Science and Technology Plaza
No. 168, Haide Third Avenue, Nanshan District
Shenzhen, 518067, the People’s Republic of China
Tel: +86-755-8628 2977
E-mail: frank.zheng@xiaoying.com
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
| | | | |
Title of each class |
| Trading symbol |
| Name of each exchange on which registered |
American depositary shares, each ADS represents six Class A ordinary shares, par value US$0.0001 per share* | | XYF | | The New York Stock Exchange |
Class A ordinary shares, par value US$0.0001 per share ** | | N/A | | The New York Stock Exchange |
* Effective from November 19, 2020, the ratio of ADSs representing the Class A ordinary shares changed from one (1) ADS representing two (2) Class A ordinary shares to one (1) ADS representing six (6) Class A ordinary shares.
** Not for trading, but only in connection with the listing of the American depositary shares on the New York Stock Exchange.
Securities registered or to be registered pursuant to Section 12(g) of the Act.
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
None
(Title of Class)
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
293,553,607 ordinary shares, comprised of 195,953,607 Class A ordinary shares, par value $0.0001 per share, and 97,600,000 Class B ordinary shares, par value $0.0001per share, were outstanding as of December 31, 2023.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No ☒
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes ☐ No ☒
Note - Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. Check one:
Large accelerated filer ☐ | Accelerated filer ☒ | Non-accelerated filer ☐ | Emerging growth company ☐ |
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards † provided pursuant to Section 13(a) of the Exchange Act. ☐
†The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to section 12(b) of Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP ☒ | International Financial Reporting Standards as issued | Other ☐ |
| by the International Accounting Standards Board ☐ | |
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
☐ Item 17 ☐ Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ⌧
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
Yes ☐ No ☐
Explanatory Note
X Financial (the “Company”) is filing this Amendment No. 1 (this “Amendment” or “Form 20-F/A”) to the annual report on Form 20-F for the fiscal year ended December 31, 2023, which was filed with the U.S. Securities and Exchange Commission (the “SEC”) on April 29, 2024 (the “Original Form 20-F”) to make certain changes as described below.
Background
The Company recently identified two errors in the presentation of consolidated statements of comprehensive income (loss) (“Income Statement”) and classification of consolidated statements of cash flows (“Statement of Cash Flows”):
| ● | Error in presentation of Income Statement: The Company incorrectly presented the gain (loss) from certain financial investments accounted for under the equity method, which was reported under “Income (loss) from financial investments” before income tax expense for the years ended December 31, 2022 and 2023. According to S-X Rule 5-03(b), these earnings and losses should be reported after income tax expense. Additionally, it is common practice that “Impairment losses on long-term investments” accounted under the equity method would generally be recognized in the same line that it presents its equity in earnings of the affiliate, which is after income tax expense. As a result, for the year ended December 31, 2022, there was an overstatement of income (loss) before income taxes. And for the year ended December 31, 2023, there was an understatement of income (loss) before income taxes. The presentation error does not affect net income for any periods presented. |
| ● | Error in classification of Statement of Cash Flows: The Company incorrectly classified Xiaoying Microcredit’s loan origination and collection activities as operating activities in the Statement of Cash Flows for each of the years in the three-year period ended December 31, 2023. According to ASC 230-10-45-12 and ASC 230-10-45-13, making and collecting loans, as well as receiving loan payments and disbursing loan proceeds (except for certain debt instruments acquired for resale), are classified as investing activities. As a result, there was an understatement of cash provided by operating activities and cash used in investing activities for each of the years in the three-year period ended December 31, 2023. The classification error does not affect the overall net direction of cash inflows and outflows for both operating and investing activities and the net increase (decrease) in cash and cash equivalents and restricted cash for any periods remained unchanged. |
The Company has analyzed the errors, both individually and aggregately, and determined that they did not result in material misstatements of the Company’s financial statements. Therefore, no restatement of the previously issued financial statements, including the Original Form 20-F and the unaudited financial results furnished on Form 6-K for the quarters ended March 31, 2024, June 30, 2024, and September 30, 2024, is required.
Considering the foregoing, management reassessed the effectiveness of the Company’s internal control over financial reporting (“ICFR”) as of December 31, 2023, based on the framework established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. As a result of the reassessment, management identified a material weakness in its ICFR related to a lack of sufficient US GAAP knowledge by the financial reporting personnel regarding Statement of Cash Flows classification and consolidated financial statements presentation.
To address the material weakness, the Company has implemented additional review procedures and training sessions to ensure proper Statement of Cash Flows classification and consolidated financial statements presentation. The Company expects to fully remediate the material weakness by the end of fiscal year 2024. However, remediation will not be considered complete until the new controls are operational subsequent to the additional training to allow management to assess their effectiveness.
As a result of the material weakness identified, the Company concluded that its internal control over financial reporting (“ICFR”) was not effective as of December 31, 2023. Therefore, the Company is (a) amending and restating Part I, Item 3. Risk Factors and Part II, Item 15. Controls and Procedures in this Form 20-F/A to update its conclusion regarding the effectiveness of its disclosure controls and procedures and its ICFR as of December 31, 2023 as a result of the material weakness and (b) including in Part III, item 18, the issued audit report of KPMG Huazhen LLP (“KPMG”), the Company’s independent registered public accounting firm (PCAOB ID: 1186), as of December 31, 2023 regarding the Company’s ICFR as a result of the material weakness.
In accordance with Rule 12b-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company is also including with this Form 20-F/A currently dated consent of KPMG and certifications of the Company’s principal executive officer and principal financial officer (included in Part III, Item 19 “Exhibits” and attached as Exhibits 12.1, 12.2, 13.1, 13.2, and 15.1).
This Form 20-F/A should be read in conjunction with the Original Form 20-F. The Original Form 20-F remains effective as of its original filing date, except for the specific modifications and updates provided in this Form 20-F/A. This Form 20-F/A does not reflect events or circumstances occurring after the date of the Original Form 20-F. No other portions of the Original Form 20-F have been changed.
PART II
ITEM 3. KEY INFORMATION
3.D. Risk Factors
If we fail to implement and maintain an effective system of internal control over financial reporting, we may be unable to accurately report our results of operations, meet our reporting obligations or prevent fraud.
We are subject to reporting obligations under the U.S. securities laws. The SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring every public company to include a management report on such company’s internal control over financial reporting in its annual report, which contains management’s assessment of the effectiveness of our internal control over financial reporting. As we are no longer an emerging growth company, we are subject to the requirement that an independent registered public accounting firm must attest to and report on the effectiveness of our internal control over financial reporting.
Our management, with the participation of our chief executive officer and chief financial officer, has performed an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15I under the Exchange Act) and internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) as of the end of the period covered by this annual report, as required by Rule 13a-15(b) through (c) under the Exchange Act. Based on our evaluation, the material weakness related to a lack of sufficient US GAAP knowledge by financial reporting personnel regarding Statement of Cash Flows classification and consolidated financial statements presentation remains unresolved. Therefore, our management has concluded that our internal control over financial reporting was not effective as of December 31, 2023.
If we fail to maintain effective internal control over financial reporting in the future, we could suffer material misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial information. This could in turn limit our access to capital markets, harm our results of operations, and lead to a decline in the trading price of our ADSs. Additionally, ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on which we list, regulatory investigations and civil or criminal sanctions. We may also be required to restate our financial statements from prior periods.
In addition, our internal control over financial reporting will not prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud will be detected.
ITEM 15. CONTROLS AND PROCEDURES
(a) | Evaluation of Disclosure Controls and Procedures |
Our management, with the participation of our chief executive officer and chief financial officer, has performed an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report, as required by Rule 13a-15(b) under the Exchange Act.
Based upon that evaluation, our management has concluded that, as of December 31, 2023, our disclosure controls and procedures were not effective due to the material weakness in internal control over financial reporting described below under the heading “Management’s annual report on internal control over financial reporting (Restated).” We have implemented and are executing a remediation plan to address the material weakness.
(b) | Management’s annual report on internal control over financial reporting (Restated) |
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act.
Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements in accordance with U.S. GAAP, and includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of our company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with U.S. GAAP, and that receipts and expenditures of our company are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of the unauthorized acquisition, use or disposition of our company’s assets that could have a material effect on the consolidated financial statements.
A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness of our internal control over financial reporting to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
As defined in the standards established by the U.S. Public Company Accounting Oversight Board, a “material weakness” is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.
Our management evaluated the effectiveness of our internal control over financial reporting, as required by Rule 13a-15(c) of the Exchange Act, based on criteria established in the framework in Internal Control--Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management has concluded that our internal control over financial reporting was not effective as of December 31, 2023 because of a material weakness related to a lack of sufficient US GAAP knowledge by financial reporting personnel regarding Statement of Cash Flows classification and consolidated financial statements presentation was identified in internal control over financial reporting.
(c) | Attestation Report of the Registered Public Accounting Firm |
KPMG Huazhen LLP (KPMG) has audited the effectiveness of our internal control over financial reporting as of December 31, 2023 as stated in the Original 20-F Form. Given the material weakness identified, KPMG has amended its audit report on the effectiveness of our internal control over financial reporting, included in the Part III, Item 18 Financial Statements within this Form 20-F/A.
(d) | Changes in Internal Control over Financial Reporting |
As of December 31, 2023, there was a material weakness related to a lack of sufficient US GAAP knowledge by financial reporting personnel regarding Statement of Cash Flows classification and consolidated financial statements presentation that remains unresolved.
To address the material weakness, the Company has implemented additional review procedures and training sessions to ensure proper Statement of Cash Flows classification and consolidated financial statements presentation. The Company expects to fully remediate the material weakness by the end of fiscal year 2024. However, remediation will not be considered complete until the new controls are operational subsequent to the additional training to allow management to assess their effectiveness.
Other than those described above, there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the period covered by this annual report on Form 20-F that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
PART III
ITEM 18. FINANCIAL STATEMENTS
Given the material weakness identified, our independent registered public accounting firm has amended its audit report on the effectiveness of our internal control over financial reporting, which is included below.
ITEM 19. EXHIBITS
Exhibit | | Description of Document |
|---|---|---|
| | |
1.1 | | |
2.1 | | |
2.2 | | |
2.3 | | |
2.4 | | |
4.1 | | |
4.2 | | |
4.3 | | |
4.4 | | |
4.5 | | |
4.6 | | |
4.7 | | |
4.8*** | | |
4.9*** | | |
4.10*** | | |
4.11*** | | |
4.12*** | |
Exhibit | | Description of Document |
|---|---|---|
| | |
4.13*** | | |
4.14*** | | |
4.15*** | | |
4.16*** | | |
4.17*** | | |
4.18*** | | |
4.19*** | | |
4.20*** | | |
4.21*** | | |
4.22*** | | |
4.23*** | | |
4.24 | | |
4.25 | | |
4.26 | | |
4.27 | | |
| ||
4.28 | | |
4.29 | |
Exhibit | | Description of Document |
|---|---|---|
| | |
4.30 | | |
4.31 | | |
4.32 | | |
4.33 | | |
8.1*** | | List of subsidiaries, VIEs and subsidiaries of the VIEs of the Registrant |
10.1 | | |
10.2 | | |
11.1 | | |
12.1* | | |
12.2* | | |
13.1** | | |
13.2** | | |
15.1* | | |
19.1*** | | |
97.1*** | | |
99.1 | | |
99.2 | | |
99.3*** | | |
101.INS* | | XBRL Instance Document |
101.SCH* | | XBRL Taxonomy Extension Schema Document |
101.CAL* | | XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF* | | XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB* | | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE* | | XBRL Taxonomy Extension Presentation Linkbase Document |
104** | | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
* Filed herewith
** Furnished herewith
*** Previously filed
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing its Amendment No. 1 to the annual report on Form 20-F and that it has duly caused and authorized the undersigned to sign this Amendment No. 1 to the annual report on its behalf.
| ||
X Financial | | |
| | |
By: | /s/ Yue (Justin) Tang | |
Name: | Yue (Justin) Tang | |
Title: | Chief Executive Officer | |
| | |
Date: December 5, 2024 | | |
X FINANCIAL
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
F-1
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
X Financial:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of X Financial, its subsidiaries and variable interest entities (the Company) as of December 31, 2023 and 2022, the related consolidated statements of comprehensive income (loss), changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2023, and the related notes and financial statement Schedule I (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated April 29, 2024, except for the restatement as to the effectiveness of internal control over financial reporting for the material weakness related to lack of sufficient US GAAP knowledge by financial reporting personnel regarding consolidated statements of cash flows classification and consolidated financial statements presentation, as to which the date is December 05, 2024, expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Variable consideration related to the loan facilitation and post-origination services revenues
As discussed in Note 2(d) to the consolidated financial statements, the Company’s loan facilitation service fees and post-origination service fees for the year ended December 31, 2023 were RMB2,740,974,233 and RMB596,581,987, respectively.
F-2
The transaction price for loan facilitation and post-origination services includes variable consideration in the form of default risk and prepayment risk of the borrowers. The Company estimates variable consideration using the expected value methodology, including models to estimate the loss rates, the prepayment rates, and the weighted macroeconomic forecast, which are based on past events, current conditions, and reasonable and supportable forecasts over the life of the loans. The expected value of the consideration is the product of multiplying the loan principal and the pre-agreed service fee rates, adjusted for the loss rates and the prepayment rates. The loss rates are calculated using vintage-based loss rate model, adjusted for a weighted macroeconomic forecast. The models consider (i) the historical loss experience period for the vintage-based loss rates; (ii) the historical prepayment experience period for the prepayment rates; and (iii) the weighting of multiple macroeconomic forecast scenarios over the life of the loans and selected economic variables, including gross domestic product (GDP), unemployment rate and other macro-economic variables.
We identified the assessment of variable consideration related to the loan facilitation and post-origination services revenues as a critical audit matter. A high degree of audit effort, including specialized skills and knowledge, and subjective and complex auditor judgment was involved in the assessment of the expected value methodology, including the models used to estimate the vintage-based loss rates, prepayment rates and weighted macroeconomic forecast. In addition, we evaluated the weighting of multiple macroeconomic forecast scenarios and selected economic variables.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s measurement of the variable consideration related to the loan facilitation and post-origination services revenues, including controls over the:
| ● | development of the expected value methodology |
| ● | development of the models used to estimate the vintage-based loss rates, prepayment rates, and weighted macroeconomic forecast |
| ● | identification and determination of the weighting of multiple macroeconomic forecast scenarios and economic variables. |
We evaluated the Company’s process to develop the variable consideration related to the loan facilitation and post-origination services revenues by (1) evaluating the expected value methodology for compliance with U.S. generally accepted accounting principles; (2) testing certain sources of data, factors, and assumptions, including prepayment rates, the Company used and considered the relevance and reliability of such data, factors and assumptions; and (3) inspecting contractual documents to determine if all arrangement terms that may have impacted revenue recognition were identified and properly considered. In addition, we involved credit risk professionals with specialized skill and knowledge, who assisted in:
| ● | assessing the conceptual soundness of the models used to estimate the vintage-based loss rates and weighted macroeconomic forecast by inspecting the models’ documentation to determine whether the models are suitable for their intended use |
| ● | assessing the weighting of multiple macroeconomic forecast scenarios and the selection of the economic variables by comparing them to the Company’s business environment and relevant industry practices. |
F-3
Assessment of the allowance for credit losses on loans evaluated on a collective basis
As discussed in Notes 2(m) and 2(ah) to the consolidated financial statements, the allowance for credit losses evaluated on a collective basis related to loans receivable from Xiaoying Credit Loans and other loans (the collective ACL) was RMB188,719,449 as of December 31, 2023, which represent loans generated from the microcredit business and loans facilitated through the Consolidated Trusts and Partnerships. The Company establishes the collective ACL by applying a current expected credit losses methodology, which is based on past events, current conditions, and reasonable and supportable forecasts over the life of the loans. The collective ACL is measured based on loans that share similar risk characteristics and includes both quantitative and qualitative components. The collective ACL for loans generated from the microcredit business is calculated using vintage-based loss rate and macroeconomic forecast scenario models, and is the product of multiplying the Company’s estimates of vintage-based loss rates and individual loan level exposure at default (EAD) on an undiscounted basis, adjusted for a weighted macroeconomic forecast. The collective ACL for loans facilitated through the Consolidated Trusts and Partnerships is calculated using probability of default (PD) determined by external credit ratings of financial institutional cooperators, loss given default (LGD), and macroeconomic forecast scenario models, and is the product of multiplying the PD, LGD, and individual loan level EAD on an undiscounted basis, adjusted for a weighted macroeconomic forecast. The models for the collective ACL consider (i) the historical loss experience period for the vintage-based loss rates; (ii) external credit ratings of financial institutional cooperators used to determine the PD; and (iii) the weighting of multiple macroeconomic forecast scenarios over the life of the loans and selected economic variables, including gross domestic product (GDP), unemployment rate and other macro-economic variables that were determined to be the most relevant to the credit losses. The qualitative component of the collective ACL represents the Company’s judgment of additional considerations to account for internal and external risk factors that are not adequately measured in the quantitative component of the collective ACL, including consideration of idiosyncratic risk factors or other relevant factors.
We identified the assessment of the collective ACL as a critical audit matter. A high degree of audit effort, including specialized skills and knowledge, and subjective and complex auditor judgment was involved in the assessment of the collective ACL due to significant measurement uncertainty. Specifically, the assessment encompassed the evaluation of the collective ACL methodology, including the models used to estimate the vintage-based loss rates, PD, and weighted macroeconomic forecast. In addition, we evaluated the weighting of multiple macroeconomic forecast scenarios and selected economic variables.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s measurement of the collective ACL, including controls over the:
| ● | development of the collective ACL methodology |
| ● | development of the models used to estimate the vintage-based loss rates, PD, and weighted macroeconomic forecast |
| ● | identification and determination of the weighting of multiple macroeconomic forecast scenarios and economic variables. |
We evaluated the Company’s process to develop the collective ACL by testing certain sources of data, factors, and assumptions the Company used and considered the relevance and reliability of such data, factors and assumptions. In addition, we involved credit risk professionals with specialized skill and knowledge, who assisted in:
| ● | evaluating the collective ACL methodology for compliance with U.S. generally accepted accounting principles |
| ● | assessing the conceptual soundness of the models used to estimate the vintage-based loss rates, PD and weighted macroeconomic forecast by inspecting the models’ documentation to determine whether the models are suitable for their intended use |
| ● | assessing the weighting of multiple macroeconomic forecast scenarios and the selection of the economic variables by comparing them to the Company’s business environment and relevant industry practices. |
/s/ KPMG Huazhen LLP
We have served as the Company’s auditor since 2020.
Shenzhen, China
April 29, 2024, except for the restatement as to the effectiveness of internal control over financial reporting for the material weakness related to lack of sufficient US GAAP knowledge by financial reporting personnel regarding consolidated statements of cash flows classification and consolidated financial statements presentation, as to which the date is December 05, 2024
F-4
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
X Financial:
Opinion on Internal Control Over Financial Reporting
We have audited X Financial, its subsidiaries and variable interest entities’ (the “Company”) internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, because of the effect of the material weakness, described below, on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2023 and 2022, the related consolidated statements of comprehensive income (loss), changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2023, and the related notes and financial statement Schedule I (collectively, the consolidated financial statements), and our report dated April 29, 2024, except for the restatement as to the effectiveness of internal control over financial reporting for the material weakness related to lack of sufficient US GAAP knowledge by financial reporting personnel regarding consolidated statements of cash flows classification and consolidated financial statements presentation, as to which the date is December 05, 2024, expressed an unqualified opinion on those consolidated financial statements.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. A material weakness related to lack of sufficient US GAAP knowledge by financial reporting personnel regarding consolidated statements of cash flows classification and consolidated financial statements presentation has been identified and included in management’s assessment. The material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2023 consolidated financial statements, and this report does not affect our report on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s annual report on internal control over financial reporting (Restated). Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
F-5
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG Huazhen LLP
Shenzhen, China
April 29, 2024, except for the restatement as to the effectiveness of internal control over financial reporting for the material weakness related to lack of sufficient US GAAP knowledge by financial reporting personnel regarding consolidated statements of cash flows classification and consolidated financial statements presentation, as to which the date is December 05, 2024.
F-6
X FINANCIAL
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2022 AND 2023
| | | | | | | | |
| | | | As of | | | | |
| | | | December 31, | | As of December 31, | ||
|
| Notes |
| 2022 |
| 2023 |
| 2023 |
| | | | RMB | | RMB | | US$ |
ASSETS | | | | | | | | |
Cash and cash equivalents | | | | 602,270,607 | | 1,195,351,730 | | 168,361,770 |
Restricted cash, net of allowance for credit losses of RMB nil and RMB86,019 as of December 31, 2022 and 2023, respectively (including RMB398,439,250 and RMB711,756,581 from Consolidated Trusts and Partnerships as of December 31, 2022 and 2023, respectively) | | | | 404,689,250 | | 749,069,826 | | 105,504,278 |
Accounts receivable and contract assets, net of allowance for credit losses of RMB21,875,166 and RMB9,266,619 as of December 31, 2022 and 2023, respectively (including RMB37,262,868 and RMB54,749,985 from Consolidated Trusts and Partnerships as of December 31, 2022 and 2023, respectively; including RMB327,878,935 and RMB1,096,251 from related parties as of December 31, 2022 and 2023, respectively) | | 2(l) | | 1,161,911,740 | | 1,659,587,975 | | 233,748,077 |
Loans receivable from Xiaoying Credit Loans and other loans, net of allowance for credit losses of RMB106,479,154 and RMB188,719,449 as of December 31, 2022 and 2023, respectively (including RMB2,771,927,123 and RMB3,571,283,174 from Consolidated Trusts and Partnerships as of December 31, 2022 and 2023, respectively) | | 2(m) | | 3,810,393,225 | | 4,947,833,357 | | 696,887,753 |
Loan receivable from Xiaoying Housing Loans, net | | 2(o) | | 10,061,258 | | 8,656,846 | | 1,219,291 |
Loans at fair value (including RMB120,279,612 and nil from Consolidated Trusts and Partnerships as of December 31, 2022 and 2023, respectively) | | 3 | | 120,279,612 | | — | | — |
Deposits to institutional cooperators, net of allowance for credit losses of RMB3,322,575 and RMB2,649,017 as of December 31, 2022 and 2023, respectively | | 5 | | 1,770,317,425 | | 1,702,472,396 | | 239,788,222 |
Prepaid expenses and other current assets (including RMB5,073,797 and nil from Consolidated Trusts and Partnerships as of December 31, 2022 and 2023, respectively) | | 4 | | 71,082,341 | | 48,767,987 | | 6,868,827 |
Deferred tax assets, net | | 14 | | 88,428,436 | | 135,957,626 | | 19,149,231 |
Long-term investments | | 10 | | 495,994,880 | | 493,411,355 | | 69,495,536 |
Financial investments (amortized cost of nil and RMB406,243,877 and allowace for credit losses of nil and nil related to investments accounted under AFS model as of December 31, 2022 and 2023, respectively) | | 9 | | 192,619,850 | | 608,198,249 | | 85,662,932 |
Property and equipment, net | | 6 | | 5,861,360 | | 8,642,392 | | 1,217,255 |
Intangible assets, net | | 7 | | 36,549,922 | | 36,810,384 | | 5,184,634 |
Other non-current assets | | | | 67,203,542 | | 55,264,517 | | 7,783,844 |
TOTAL ASSETS | | | | 8,837,663,448 | | 11,650,024,640 | | 1,640,871,650 |
LIABILITIES | | | | | | | | |
Payable to investors and institutional funding partners at amortized cost (including RMB2,627,910,203 and RMB3,584,040,757 from the Consolidated VIEs, Trusts and Partnerships, without recourse to the Company as of December 31, 2022 and 2023, respectively) | | | | 2,627,910,203 | | 3,584,040,757 | | 504,801,582 |
Payable to investors at fair value (including RMB141,288,810 and nil from the Consolidated VIEs, Trusts and Partnerships, without recourse to the Company as of December 31, 2022 and 2023, respectively) | | 3 | | 141,288,810 | | — | | — |
Guarantee liabilities | | 12 | | — | | 61,906,509 | | 8,719,349 |
Financial guarantee derivative (including RMB107,890,394 and nil from the Consolidated VIEs, Trusts and Partnerships, without recourse to the Company as of December 31, 2022 and 2023, respectively) | | 3 | | 107,890,394 | | — | | — |
Deferred guarantee income | | 12 | | — | | 46,597,143 | | 6,563,070 |
Short-term borrowings (including RMB20,000,000 and RMB320,000,000 from the Consolidated VIEs, Trusts and Partnerships, without recourse to the Company as of December 31, 2022 and 2023, respectively) | | 8 | | 70,208,800 | | 565,000,000 | | 79,578,586 |
Accrued payroll and welfare (including RMB12,047,490 and RMB15,011,080 from the Consolidated VIEs, Trusts and Partnerships, without recourse to the Company as of December 31, 2022 and 2023, respectively) | | | | 63,681,358 | | 86,770,637 | | 12,221,389 |
Other taxes payable (including RMB123,105,603 and RMB126,900,881 from the Consolidated VIEs, Trusts and Partnerships, without recourse to the Company as of December 31, 2022 and 2023, respectively) | | | | 255,690,734 | | 289,821,092 | | 40,820,448 |
Income taxes payable (including income taxes receivable of RMB1,870,729 and income taxes payable of RMB28,266,791 from the Consolidated VIEs, Trusts and Partnerships, without recourse to the Company as of December 31, 2022 and 2023, respectively) | | 14 | | 270,088,963 | | 446,499,777 | | 62,888,178 |
Deposit payable to channel cooperators | | 2(v) | | 19,700,235 | | 19,700,235 | | 2,774,720 |
Dividend payable | | | | — | | 59,226,084 | | 8,341,819 |
Accrued expenses and other current liabilities (including RMB102,148,275 and RMB69,989,510 from the Consolidated VIEs, Trusts and Partnerships, without recourse to the Company as of December 31, 2022 and 2023, respectively) | | 11 | | 476,034,533 | | 575,727,263 | | 81,089,489 |
Other non-current liabilities (including RMB1,937,009 and nil from the Consolidated VIEs, Trusts and Partnerships, without recourse to the Company as of December 31, 2022 and 2023, respectively) | | | | 51,193,049 | | 37,571,057 | | 5,291,773 |
Deferred tax liabilities | | 14 | | 721,677 | | 30,039,799 | | 4,231,017 |
TOTAL LIABILITIES | | | | 4,084,408,756 | | 5,802,900,353 | | 817,321,420 |
Commitments and Contingencies (Note 18) | | | | | | | | |
Equity: | | | | | | | | |
Common shares (US$0.0001 par value; 1,000,000,000 shares authorized as of December 31, 2022 and 2023; 329,117,943 and 329,117,943 shares issued as of December 31, 2022 and 2023; 287,918,569 and 293,553,607 shares outstanding as of December 31, 2022 and 2023) | | | | 206,793 | | 206,793 | | 29,126 |
Treasury stock (41,199,374 and 35,564,336 shares as of December 31, 2022 and 2023) | | | | (124,596,781) | | (111,520,291) | | (15,707,305) |
Additional paid-in capital | | | | 3,191,193,773 | | 3,196,942,284 | | 450,279,902 |
Retained earnings | | | | 1,622,852,316 | | 2,692,018,850 | | 379,162,925 |
Other comprehensive income | | | | 63,598,591 | | 69,476,651 | | 9,785,582 |
TOTAL EQUITY | | | | 4,753,254,692 | | 5,847,124,287 | | 823,550,230 |
TOTAL LIABILITIES AND EQUITY | | | | 8,837,663,448 | | 11,650,024,640 | | 1,640,871,650 |
The accompanying notes are an integral part of these consolidated financial statements.
F-7
X FINANCIAL
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2021, 2022 AND 2023
| | | | | | | | | | |
| | | | Year ended | | Year ended | | Year ended | ||
| | | | December 31, | | December 31, | | December 31, | ||
|
| Notes |
| 2021 |
| 2022 |
| 2023 |
| 2023 |
| | | | RMB | | RMB | | RMB | | US$ |
Net revenues | | | |
| | | |
| |
|
Loan facilitation service (including RMB76,378,015, RMB495,092,744 and RMB8,081,737 from related parties for the years ended December 31, 2021, 2022 and 2023, respectively) | | | | 2,545,592,949 | | 2,044,343,554 | | 2,740,974,233 | | 386,058,146 |
Post-origination service (including RMB2,423,567, RMB60,727,604 and RMB3,288,307 from related parties for the years ended December 31, 2021, 2022 and 2023, respectively) | | | | 315,590,118 | | 372,450,606 | | 596,581,987 | | 84,026,815 |
Financing income | | | | 671,901,495 | | 966,277,466 | | 1,137,336,454 | | 160,190,489 |
Guarantee income | | | | — | | — | | 24,496,658 | | 3,450,282 |
Other revenue | | | | 93,380,543 | | 179,878,489 | | 315,494,698 | | 44,436,499 |
Total net revenue | | 2(d) | | 3,626,465,105 | | 3,562,950,115 | | 4,814,884,030 | | 678,162,231 |
Operating costs and expenses | | | | | | | | | | |
Origination and servicing | | | | 1,963,006,006 | | 2,126,741,766 | | 2,869,844,905 | | 404,209,201 |
General and administrative | | | | 187,859,411 | | 171,523,720 | | 186,515,073 | | 26,270,099 |
Sales and marketing | | | | 20,829,534 | | 15,448,209 | | 12,538,815 | | 1,766,055 |
(Reversal of) provision for contingent guarantee liabilities | | 12 | | (24,284) | | (14,000,000) | | 67,519,980 | | 9,509,990 |
Provision for accounts receivable and contract assets | | 2(l) | | 77,247,810 | | 21,835,625 | | 12,233,743 | | 1,723,087 |
Reversal of provision for loan receivable from Xiaoying Housing Loans | | 2(o) | | (377,559) | | (6,066,176) | | (4,213,234) | | (593,422) |
Provision for loans receivable from Xiaoying Credit Loans and other loans | | 2(m) | | 76,395,168 | | 164,641,879 | | 233,350,276 | | 32,866,699 |
(Reversal of) provision for credit losses on deposits to institutional cooperators | | 5 | | (8,291,421) | | 1,295,879 | | (673,558) | | (94,869) |
(Reversal of) provision of credit losses for other financial assets | | 2(k) | | (1,223,360) | | (764,600) | | 86,019 | | 12,116 |
Total operating expenses | | | | 2,315,421,305 | | 2,480,656,302 | | 3,377,202,019 | | 475,668,956 |
Income from operations | | | | 1,311,043,800 | | 1,082,293,813 | | 1,437,682,011 | | 202,493,275 |
Interest income (expenses), net (including RMB18,019,246, RMB412,341 and nil from related parties for the year ended December 31, 2021, 2022 and 2023, respectively) | | | | 19,709,140 | | 3,756,232 | | (20,364,821) | | (2,868,325) |
Foreign exchange gain (loss) | | | | 5,147,137 | | (19,962,949) | | (4,023,039) | | (566,633) |
Income (loss) from financial investments | | 9 | | — | | 20,900,025 | | (12,225,202) | | (1,721,884) |
Impairment losses on financial investments | | 9 | | — | | (8,874,750) | | — | | — |
Impairment losses on long-term investments | | 10 | | — | | (26,865,733) | | (46,771,435) | | (6,587,619) |
Change in fair value of financial guarantee derivative | | 3 | | (170,338,993) | | 137,654,096 | | 24,966,242 | | 3,516,422 |
Fair value adjustments related to Consolidated Trusts | | 3 | | (7,266,784) | | (6,168,307) | | (531,202) | | (74,818) |
Other income, net | | | | 32,506,084 | | 40,723,863 | | 24,351,280 | | 3,429,806 |
Income before income taxes and gain (loss) from equity in affiliates | | | | 1,190,800,384 | | 1,223,456,290 | | 1,403,083,834 | | 197,620,224 |
Income tax expense | | 14 | | (368,735,701) | | (389,357,613) | | (249,437,644) | | (35,132,557) |
Gain (loss) from equity in affiliates, net of tax | | 10 | | 3,341,862 | | (22,102,238) | | 33,147,784 | | 4,668,768 |
Net income | | | | 825,406,545 | | 811,996,439 | | 1,186,793,974 | | 167,156,435 |
Less: net loss attributable to non-controlling interests | | | | (478) | | — | | — | | — |
Net income attributable to X Financial | | | | 825,407,023 | | 811,996,439 | | 1,186,793,974 | | 167,156,435 |
| | | | | | | | | | |
Net income | | | | 825,406,545 | | 811,996,439 | | 1,186,793,974 | | 167,156,435 |
Other comprehensive income (loss), net of tax of nil: | | | | | | | | | | |
Gain (loss) from equity in affiliates | | | | — | | 204,444 | | (6,852) | | (965) |
Income from financial investments | | | | — | | — | | 474,792 | | 66,873 |
Foreign currency translation adjustments | | | | (14,749,519) | | 57,084,593 | | 5,410,120 | | 762,000 |
Comprehensive income | | | | 810,657,026 | | 869,285,476 | | 1,192,672,034 | | 167,984,343 |
Less: comprehensive loss attributable to non-controlling interests | | | | (478) | | — | | — | | — |
Comprehensive income attributable to X Financial | | | | 810,657,504 | | 869,285,476 | | 1,192,672,034 | | 167,984,343 |
Net income per share—basic | | 15 | | 2.51 | | 2.57 | | 4.12 | | 0.58 |
Weighted average number of ordinary shares outstanding—basic | | | | 329,230,273 | | 316,444,826 | | 288,115,969 | | 288,115,969 |
Net income per share—diluted | | 15 | | 2.45 | | 2.52 | | 4.08 | | 0.57 |
Weighted average number of ordinary shares outstanding—diluted | | | | 336,881,082 | | 322,403,387 | | 290,833,214 | | 290,833,214 |
The accompanying notes are an integral part of these consolidated financial statements.
F-8
X FINANCIAL
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2021, 2022 AND 2023
| | | | | | | | | | | | | | | | | | |
|
| |
| |
| |
| |
| Retained |
| Accumulated |
| Equity |
| |
| |
| | | | Common | | Treasury | | | | earnings | | other | | attributable | | Non- | | |
| | Common | | share | | stock | | Additional | | (Accumulated | | comprehensive | | to | | controlling | | Total |
| | share | | amount | | amount | | paid-in capital | | deficit) | | income | | X Financial | | Interests | | equity |
|
| number |
| (RMB) |
| (RMB) |
| (RMB) |
| (RMB) |
| (RMB) |
| (RMB) |
| (RMB) |
| (RMB) |
Balance at December 31, 2020 |
| 323,117,943 |
| 202,870 |
| — |
| 3,068,045,239 |
| (14,551,146) |
| 21,059,073 |
| 3,074,756,036 |
| 1,287,616 |
| 3,076,043,652 |
Issuance of new shares |
| 6,000,000 |
| 3,923 |
| — |
| (3,923) |
| — |
| — |
| — |
| — |
| — |
Exercise of share option | | — | | — | | — | | 2,959,511 | | — | | — | | 2,959,511 | | — | | 2,959,511 |
Share-based compensation (Note 16) | | — | | — | | — | | 88,434,772 | | — | | — | | 88,434,772 | | — | | 88,434,772 |
Acquisition of non-controlling interest | | — | | — | | — | | 87,138 | | — | | — | | 87,138 | | (1,287,138) | | (1,200,000) |
Net income (loss) |
| — | | — | | — | | — | | 825,407,023 | | — | | 825,407,023 | | (478) | | 825,406,545 |
Foreign currency translation adjustments | | — | | — | | — | | — | | — | | (14,749,519) | | (14,749,519) | | — | | (14,749,519) |
Balance at December 31, 2021 |
| 329,117,943 | | 206,793 | | — | | 3,159,522,737 | | 810,855,877 | | 6,309,554 | | 3,976,894,961 | | — | | 3,976,894,961 |
Repurchase of common shares |
| (48,088,568) | | — | | (146,740,902) | | — | | — | | — | | (146,740,902) | | — | | (146,740,902) |
Transfer to employee stock ownership plans |
| 6,889,194 | | — | | 22,144,121 | | (22,144,121) | | — | | — | | — | | — | | — |
Exercise of share option | | — | | — | | — | | 277,342 | | — | | — | | 277,342 | | — | | 277,342 |
Share-based compensation (Note 16) | | — | | — | | — | | 53,537,815 | | — | | — | | 53,537,815 | | — | | 53,537,815 |
Net income | | — | | — | | — | | — | | 811,996,439 | | — | | 811,996,439 | | — | | 811,996,439 |
Gain from equity in affiliates | | — | | — | | — | | — | | — | | 204,444 | | 204,444 | | — | | 204,444 |
Foreign currency translation adjustments | | — | | — | | — | | — | | — | | 57,084,593 | | 57,084,593 | | — | | 57,084,593 |
Balance at December 31, 2022 | | 287,918,569 | | 206,793 | | (124,596,781) | | 3,191,193,773 | | 1,622,852,316 | | 63,598,591 | | 4,753,254,692 | | — | | 4,753,254,692 |
Repurchase of common shares | | (5,026,374) | | — | | (24,872,828) | | — | | — | | — | | (24,872,828) | | — | | (24,872,828) |
Transfer to employee stock ownership plans | | 10,661,412 | | — | | 37,949,318 | | (37,949,318) | | — | | — | | — | | — | | — |
Exercise of share option | | — | | — | | — | | 1,099,619 | | — | | — | | 1,099,619 | | — | | 1,099,619 |
Share-based compensation (Note 16) | | — | | — | | — | | 42,598,210 | | — | | — | | 42,598,210 | | — | | 42,598,210 |
Net income | | — | | — | | — | | — | | 1,186,793,974 | | — | | 1,186,793,974 | | — | | 1,186,793,974 |
Loss from equity in affiliates | | — | | — | | — | | — | | — | | (6,852) | | (6,852) | | — | | (6,852) |
Income from financial investments | | — | | — | | — | | — | | — | | 474,792 | | 474,792 | | — | | 474,792 |
Foreign currency translation adjustments | | — | | — | | — | | — | | — | | 5,410,120 | | 5,410,120 | | — | | 5,410,120 |
Dividend to shareholders | | — | | — | | — | | — | | (117,627,440) | | — | | (117,627,440) | | — | | (117,627,440) |
Balance at December 31, 2023 |
| 293,553,607 | | 206,793 | | (111,520,291) | | 3,196,942,284 | | 2,692,018,850 | | 69,476,651 | | 5,847,124,287 | | — | | 5,847,124,287 |
| | | | | | | | | | | | | | | | | | |
|
| |
| |
| |
| |
| Retained |
| Accumulated |
| Equity |
| |
| |
| | | | Common | | Treasury | | | | earnings | | other | | attributable | | Non- | | |
| | Common | | share | | stock | | Additional | | (Accumulated | | comprehensive | | to | | controlling | | Total |
| | share | | amount | | amount | | paid-in capital | | deficit) | | income | | X Financial | | interests | | equity |
|
| number |
| (US$) |
| (US$) |
| (US$) |
| (US$) |
| (US$) |
| (US$) |
| (US$) |
| (US$) |
Balance at December 31, 2022 | | 287,918,569 | | 29,126 | | (17,549,090) | | 449,470,242 | | 228,573,968 | | 8,957,674 | | 669,481,920 | | — | | 669,481,920 |
Repurchase of common shares | | (5,026,374) | | — | | (3,503,265) | | — | | — | | — | | (3,503,265) | | — | | (3,503,265) |
Transfer to employee stock ownership plans | | 10,661,412 | | — | | 5,345,050 | | (5,345,050) | | — | | — | | — | | — | | — |
Exercise of share option |
| — | | — | | — | | 154,878 | | — | | — | | 154,878 | | — | | 154,878 |
Share-based compensation (Note 16) |
| — | | — | | — | | 5,999,832 | | — | | — | | 5,999,832 | | — | | 5,999,832 |
Net income | | — | | — | | — | | — | | 167,156,435 | | — | | 167,156,435 | | — | | 167,156,435 |
Loss from equity in affiliates | | — | | — | | — | | — | | — | | (965) | | (965) | | — | | (965) |
Income from financial investments | | — | | — | | — | | — | | — | | 66,873 | | 66,873 | | — | | 66,873 |
Foreign currency translation adjustments |
| — |
| — |
| — |
| — |
| — |
| 762,000 |
| 762,000 |
| — |
| 762,000 |
Dividend to shareholders | | — | | — | | — | | — | | (16,567,478) | | — | | (16,567,478) | | — | | (16,567,478) |
Balance at December 31, 2023 |
| 293,553,607 | | 29,126 | | (15,707,305) | | 450,279,902 | | 379,162,925 | | 9,785,582 | | 823,550,230 | | — | | 823,550,230 |
The accompanying notes are an integral part of these consolidated financial statements.
F-9
X FINANCIAL
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2021, 2022 AND 2023
| | | | | | | | |
| | Year ended | | Year ended | | | | |
| | December 31, | | December 31, | | Year ended December 31, | ||
|
| 2021 |
| 2022 |
| 2023 |
| 2023 |
| | RMB | | RMB | | RMB | | US$ |
CASH FLOWS FROM OPERATING ACTIVITIES | |
| | | |
| |
|
Net income | | 825,406,545 | | 811,996,439 | | 1,186,793,974 | | 167,156,435 |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | |
Depreciation and amortization | | 8,135,552 | | 6,646,312 | | 5,260,605 | | 740,941 |
Share-based compensation | | 88,434,772 | | 53,537,815 | | 42,598,210 | | 5,999,832 |
Impairment losses on financial investments | | — | | 8,874,750 | | — | | — |
Impairment losses on long-term investments | | — | | 26,865,733 | | 46,771,435 | | 6,587,619 |
(Gain) loss from equity in affiliates | | (3,341,862) | | 22,102,238 | | (33,147,784) | | (4,668,768) |
(Gain) loss from disposal of property and equipment | | (180,537) | | (2,678) | | 148,198 | | 20,873 |
(Income) loss from financial investments | | — | | (20,900,025) | | 12,225,202 | | 1,721,884 |
Provision for accounts receivable and contract assets | | 77,247,810 | | 21,835,625 | | 12,233,743 | | 1,723,087 |
Provisions for loans receivable from Xiaoying Credit Loans and other loans | | 76,395,168 | | 164,641,879 | | 233,350,276 | | 32,866,699 |
(Reversal of) provision for loan receivable from Xiaoying Housing Loans | | (377,559) | | (6,066,176) | | (4,213,234) | | (593,422) |
(Reversal of) provision for credit losses on deposits to institutional cooperators | | (8,291,421) | | 1,295,879 | | (673,558) | | (94,869) |
(Reversal of) provision of credit losses for other financial assets | | (1,223,360) | | (764,600) | | 86,019 | | 12,116 |
Fair value adjustments related to Consolidated Trusts | | 7,266,784 | | 6,168,307 | | 531,202 | | 74,818 |
Change in fair value of financial guarantee derivative | | 170,338,993 | | (137,654,096) | | (24,966,242) | | (3,516,422) |
Deferred tax expenses (benefits) | | 333,420,104 | | 195,589,376 | | (29,258,045) | | (4,120,909) |
Other non-cash expenses (income) | | (117,889) | | 658,327 | | 120,025 | | 16,905 |
Changes in operating assets and liabilities: | | | | | | | | |
Accounts receivable and contract assets | | (411,420,820) | | (436,267,247) | | (509,909,978) | | (71,819,318) |
Deposits to institutional cooperators | | (584,191,949) | | (271,206,554) | | 68,518,587 | | 9,650,641 |
Prepaid expenses and other current assets | | 21,232,196 | | 121,759,157 | | 22,921,314 | | 3,228,400 |
Loan receivable from Xiaoying Housing Loans | | 35,784,679 | | 8,088,235 | | 5,617,646 | | 791,229 |
Loan receivable from Xiaoying Credit Loans and other loans | | (890,372,164) | | (304,079,859) | | (577,307,221) | | (81,312,021) |
Other non-current assets | | 162,653 | | 1,562,738 | | (121,124) | | (17,060) |
Guarantee liabilities | | (9,789,626) | | — | | 61,906,509 | | 8,719,349 |
Deferred guarantee income | | — | | — | | 46,597,143 | | 6,563,070 |
Financial guarantee derivative | | 551,283,453 | | (223,943,839) | | (82,924,152) | | (11,679,623) |
Accrued payroll and welfare | | 9,824,303 | | 19,076,221 | | 23,089,279 | | 3,252,057 |
Other taxes payable | | 146,468,684 | | 36,144,805 | | 34,130,358 | | 4,807,160 |
Income taxes payable | | 41,231,547 | | 152,940,513 | | 176,410,814 | | 24,846,943 |
Deposit payable to channel cooperators | | (460,000) | | (1,312,000) | | — | | — |
Accrued expenses and other current liabilities | | (33,694,875) | | 65,114,595 | | 97,347,968 | | 13,711,175 |
CASH PROVIDED BY OPERATING ACTIVITIES | | 449,171,181 | | 322,701,870 | | 814,137,169 | | 114,668,821 |
CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | |
Purchase of property and equipment and intangible assets | | (2,620,038) | | (6,055,110) | | (8,468,350) | | (1,192,742) |
Disposal of property and equipment | | 236,783 | | 5,440 | | 18,053 | | 2,543 |
Purchase of financial investments | | (112,843,800) | | (90,539,800) | | (424,149,412) | | (59,740,195) |
Collection of financial investments | | 36,000,000 | | — | | — | | — |
Purchase of long-term investment | | (315,000,000) | | — | | — | | — |
Collection of long-term investment | | 40,000,000 | | 6,852,347 | | — | | — |
Loan to a related party | | (150,000,000) | | — | | — | | — |
Loan repayment from a related party | | 150,000,000 | | — | | — | | — |
Origination of loans receivables from Xiaoying Credit Loans and other loans | | (1,755,301,405) | | — | | — | | — |
Sale and collection of loans receivables from Xiaoying Credit Loans and other loans | | 35,848,676 | | 4,749,439 | | — | | — |
Principal payment of loans at fair value | | (2,238,372,299) | | (826,042,700) | | (70,004,009) | | (9,859,858) |
Principal collection of loans at fair value | | 3,427,158,051 | | 1,089,274,133 | | 189,752,419 | | 26,726,069 |
Principal payment of loans receivables of the Consolidated Trusts and Partnerships at amortized cost | | (2,538,004,837) | | (7,455,098,555) | | (9,090,383,262) | | (1,280,353,704) |
Principal collection of loans receivables of the Consolidated Trusts and Partnerships at amortized cost | | 915,305,038 | | 6,263,466,800 | | 8,296,900,075 | | 1,168,593,934 |
Collection of loans’ earnings rights from related party | | 160,000,000 | | 100,000,000 | | — | | — |
CASH USED IN INVESTING ACTIVITIES | | (2,347,593,831) | | (913,388,006) | | (1,106,334,486) | | (155,823,953) |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | |
Repurchase of common shares | | — | | (146,740,902) | | (24,872,828) | | (3,503,265) |
Proceeds from exercise of options | | 2,959,511 | | 277,342 | | 1,099,619 | | 154,878 |
Dividends to shareholders | | — | | — | | (58,401,356) | | (8,225,659) |
Acquisition of non-controlling interests | | (1,200,000) | | — | | — | | — |
Proceeds from short-term borrowings | | 266,500,000 | | 70,208,800 | | 802,500,000 | | 113,029,761 |
Repayments of short-term borrowings | | (450,545,000) | | (166,500,000) | | (307,708,800) | | (43,339,878) |
Cash received from institutional funding partners | | 2,052,099,474 | | — | | — | | — |
Cash paid to institutional funding partners | | (583,101,169) | | (21,310,352) | | — | | — |
Cash received from investors of Consolidated Trusts at fair value | | 454,490,000 | | 98,800,000 | | — | | — |
Cash paid to investors of Consolidated Trusts at fair value | | (1,905,959,250) | | (420,225,590) | | (141,288,810) | | (19,900,113) |
Cash received from investors and institutional funding partners of the Consolidated Trusts and Partnerships at amortized cost | | 1,466,068,260 | | 2,497,000,169 | | 3,251,997,048 | | 458,034,204 |
Cash paid to investors and institutional funding partners of the Consolidated Trusts and Partnerships at amortized cost | | — | | (1,335,158,227) | | (2,295,866,494) | | (323,366,032) |
CASH PROVIDED BY FINANCING ACTIVITIES | | 1,301,311,826 | | 576,351,240 | | 1,227,458,379 | | 172,883,896 |
Effect of foreign exchange rate changes | | (9,373,234) | | 29,255,917 | | 2,286,656 | | 322,070 |
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH | | (606,484,058) | | 14,921,021 | | 937,547,718 | | 132,050,834 |
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF YEAR | | 1,598,522,894 | | 992,038,836 | | 1,006,959,857 | | 141,827,330 |
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AT YEAR END | | 992,038,836 | | 1,006,959,857 | | 1,944,507,575 | | 273,878,164 |
Non-cash investing activities | | | | | | | | |
Switch out from VC funds measured at fair value | | — | | — | | 13,968,313 | | 1,967,396 |
Switch in VC funds measured at fair value | | — | | — | | (14,342,134) | | (2,020,047) |
Supplemental disclosures of cash flow information: | | | | | | | | |
Income taxes paid, net of refunds | | 30,958,576 | | 37,369,220 | | 102,284,875.00 | | 14,406,523 |
Interest paid for borrowings | | 6,719,912 | | 1,991,007 | | 23,247,119 | | 3,274,288 |
Reconciliation to amounts on consolidated balance sheets: | | | | | | | | |
Cash and cash equivalents | | 584,762,494 | | 602,270,607 | | 1,195,351,730 | | 168,361,770 |
Restricted cash | | 407,276,342 | | 404,689,250 | | 749,155,845 | | 105,516,394 |
Provision of credit losses for other financial assets | | — | | — | | (86,019) | | (12,116) |
Total cash and cash equivalents and restricted cash | | 992,038,836 | | 1,006,959,857 | | 1,944,421,556 | | 273,866,048 |
The accompanying notes are an integral part of these consolidated financial statements.
F-10
X FINANCIAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2021, 2022 AND 2023
1. Organization and principal activities
X Financial (the “Company” or “X Financial”) is an exempted company incorporated with limited liabilities in the Cayman Islands under the laws of the Cayman Islands on January 5, 2015. The Company, its subsidiaries and its variable interest entities (collectively referred to as the “Group”) provides personal finance services in the People’s Republic of China (“PRC”) by connecting borrowers and investors through a proprietary internet platform.
The Group began the operations through Shenzhen Ying Zhong Tong Financial Information Service Co., Ltd. (“Shenzhen Ying Zhong Tong”), which was founded in March 2014 in the Chinese Mainland by Mr. Tang, Chief Executive Officer and Mr. Zhu (the “Founders”) who collectively held more than 50% of the equity holdings.
During the period of 2015 to 2016, the Founders also established a number of special purpose vehicles (“SPVs”) to carry out personal finance business in the Chinese Mainland. At the formation date of each SPV, Shenzhen Ying Zhong Tong entered into a series of contractual agreements with the SPV and its nominal shareholder(s) include Shareholders’ Voting Rights Proxy Agreements, Exclusive Call Option Agreements, Exclusive Business Cooperation Agreements, and Equity Pledge Agreements, through which Shenzhen Ying Zhong Tong (1) has power to direct the activities that most significantly affects the economic performance of the SPV and (2) can receive the economic benefits of the SPVs that could be significant to the SPV. Accordingly, Shenzhen Ying Zhong Tong is the primary beneficiary of the SPVs.
On January 5, 2015, X Financial was incorporated in the Cayman Islands by the Founders and one other individual. The Founders collectively held more than 50% of the equity holdings of X Financial. Further, Mr. Zhu designated all of his shareholder rights to Mr. Tang through a proxy agreement. As such, Mr. Tang effectively was the controlling shareholder of the Company since its incorporation.
On August 7, 2015, the Company completed its equity financing by issuing 38,095,238 ordinary shares to an unrelated third-party investor at a consideration of US$60,000,000. In conjunction with the equity financing, the Company also issued an additional 40,000,000 ordinary shares to Mr. Yue Tang. Mr. Tang remained as the effective controlling shareholder.
In order to raise capital through its initial public offering (“IPO”) in the United States, the Group undertook a series of transactions since late 2016 with X Financial being proposed as the listing entity (“Reorganization”):
As Chinese Mainland laws and regulations prohibit and restrict foreign ownership of internet value-added businesses, the Company established a wholly-owned foreign invested subsidiary in the Chinese Mainland, Xiaoying (Beijing) Information Technology Co., Ltd. (“Beijing WFOE”) on October 28, 2015. The existing contractual agreements with the SPVs and SPVs’ shareholders held by Shenzhen Ying Zhong Tong were assigned to Beijing WFOE.
On October 19, 2016, Shenzhen Xiaoying Technology Co., Ltd. (“Shenzhen Xiaoying”) was incorporated in the Chinese Mainland by the same shareholders of the Company with identical shareholdings. In December 2016, Shenzhen Xiaoying acquired Shenzhen Ying Zhong Tong for nominal consideration and Shenzhen Ying Zhong Tong became the wholly-owned subsidiary of Shenzhen Xiaoying. As both Shenzhen Xiaoying and Shenzhen Ying Zhong Tong were controlled by Mr. Tang at the time, the transaction was a reorganization under common control.
F-11
X Financial, through its Chinese Mainland subsidiary, Beijing WFOE, entered into a series of contractual arrangements with Shenzhen Xiaoying, Beijing Ying Zhong Tong Rongxun Technology Service Co., Ltd. (“Beijing Ying Zhong Tong”) in December 2017, and Shenzhen Xintang Information Consulting Co., Ltd. (“Shenzhen Xintang”, previously named “Shenzhen Tangren Financing Guarantee Co., Ltd.”) in December 2016 and the shareholders of these entities respectively. Shenzhen Xiaoying, Beijing Ying Zhong Tong, Shenzhen Xintang and the SPVs are collectively referred to as “VIEs”. The series of contractual agreements included Shareholders’ Voting Rights Proxy Agreements, Spouse Consent Agreement, Exclusive Call Option Agreements, Exclusive Business Cooperation Agreements, and Equity Pledge Agreements. The Group believed that these contractual agreements would enable Beijing WFOE to (1) have power to direct the activities that most significantly affects the economic performance of the new VIEs and (2) receive the economic benefits of the VIEs that could be significant to the new VIEs. Accordingly, the Group is the primary beneficiary of the VIEs through Beijing WFOE.
In conjunction with the Reorganization, the Group completed equity financing of RMB1 billion in June 2017. This round of equity financing was initially conducted by increasing registered capital of Shenzhen Xiaoying by 9 existing and new investors. Subsequently, X Financial issued additional shares to the affiliates of the same shareholders of this round of equity financing such that the shareholder ownership in X Financial mirrored those in Shenzhen Xiaoying.
The Group considered the Reorganization as a reorganization of entities under common control. Accordingly, the accompanying financial statements have been prepared using historical cost basis as if the Reorganization had occurred at the beginning of the first period presented.
During December 2017, Beijing WFOE acquired two subsidiaries from Shenzhen Xiaoying at cost. During February and March 2018, one of the Group’s wholly-owned subsidiaries Shenzhen Xiaoying Puhui Technology Co., Ltd. (“Shenzhen Puhui”) acquired four subsidiaries from one of the VIE entities Shenzhen Ying Zhong Tong at cost. During 2018, predominantly all of the SPVs under Shenzhen Xiaoying had been transferred to Shenzhen Xiaoying Puhui Technology Co., Ltd. These transactions represented a reorganization of entities under common control as they were already within the consolidated Group, with no impact to the consolidated financials.
During September 2018, the Group completed an initial public offering of 11,763,478 American depositary shares (“ADSs”) at an initial offering price of US$9.50 which included the ADSs sold upon the exercise of the over-allotment option granted to the underwriters, representing 23,526,956 Class A ordinary shares.
On May 31, 2021, Shenzhen Xiaoying Microcredit Co., Ltd. (“Xiaoying Microcredit”) was incorporated in the Chinese Mainland with online microcredit business operating license by Shenzhen Xiaoying. Shenzhen Xiaoying had completed the capital contributions of RMB1 billion to Xiaoying Microcredit by the end of November, 2021.
On May 20, 2022, Tianjin Yuexin Financing Guarantee Co., Ltd. (“Tianjin Yuexin”) was incorporated in the Chinese Mainland with financing guarantee license by Shenzhen Puhui. Shenzhen Puhui had completed the capital contributions of RMB50 million to Tianjin Yuexin in 2022. By the end of December 2023, the registered capital of Tianjin Yuexin was increased to RMB1 billion.
Shenzhen Xintang did not renew its financing guarantee license in 2022. The Group settled the remaining business of Shenzhen Xintang in the first quarter of 2023. And Shenzhen Xintang (VIE) no longer guarantees any loan products. By the end of December 2023, the registered capital of Shenzhen Xintang was decreased to RMB 1 million.
F-12
As of December 31, 2023, the Company’s principal subsidiaries, VIEs and subsidiaries of the VIEs are as follows:
| | | | | | | | |
|
| Date of |
| Place of |
| Percentage |
| |
| | incorporation/ | | incorporation/ | | of legal | | |
|
| establishment |
| establishment |
| ownership |
| Principal activities |
Wholly-owned subsidiaries | |
| |
| |
| |
|
YZT (HK) Limited | | January 14, 2015 | | Hong Kong | | 100 | % | Investment holding |
Xiaoying (Beijing) Information Technology Co., Ltd. (“Beijing WFOE”) | | October 28, 2015 | | Beijing | | 100 | % | Technology development and service, sale of products |
Shenzhen Xiaoying Puhui Technology Co., Ltd. (“Shenzhen Puhui”) | | December 6, 2016 | | Shenzhen | | 100 | % | Technology development and service, sale of products |
Shenzhen Xiaoying Information Technology Co., Ltd. (“Shenzhen Xiaoying IT”) | | November 28, 2016 | | Shenzhen | | 100 | % | Technology development and service, sale of products |
Tianjin Yuexin Financing Guarantee Co., Ltd. (“Tianjin Yuexin”) | | May 20, 2022 | | Tianjing | | 100 | % | Guarantee services |
Dingyue Digital and Information Technology (Shenzhen) Co., Ltd. (“Dinigyue”) | | November 5, 2021 | | Shenzhen | | 100 | % | Technology development service |
VIEs | |
| |
| | | |
|
Shenzhen Xiaoying Technology Co., Ltd. (“Shenzhen Xiaoying”) | | October 19, 2016 | | Shenzhen | | 100 | % | Technology development and service, sale of products |
Beijing Ying Zhong Tong Rongxun Technology Service Co., Ltd. (“Beijing Ying Zhong Tong”) | | March 27, 2015 | | Beijing | | 100 | % | Technology development and service, sale of products |
Shenzhen Xintang Information Consulting Co., Ltd. (“Shenzhen Xintang”) | | December 16, 2016 | | Shenzhen | | 100 | % | Consulting services |
Significant subsidiaries of the VIEs | |
| |
| | | |
|
Shenzhen Ying Zhong Tong Financial Information Service Co., Ltd. (“Shenzhen Ying Zhong Tong”) | | March 7, 2014 | | Shenzhen | | 100 | % | Technology development and service, sale of products |
Shenzhen Ying Ai Gou Trading Co., Ltd. (“Shenzhen Ying Ai Gou”) | | October 25, 2018 | | Shenzhen | | 100 | % | E-commerce services |
Shenzhen Xiaoying Microcredit Co., Ltd. (“Xiaoying Microcredit”) | | May 31,2021 | | Shenzhen | | 100 | % | Microcredit services |
2. Summary of significant accounting policies
(a)Basis of Presentation and Consolidation
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
(b)Principles of Consolidation
Variable interest entity
The consolidated financial statements include the financial statements of the Company, its wholly-owned subsidiaries, and consolidated VIEs. All intercompany transactions and balances have been eliminated.
The Company, through its wholly-owned foreign invested subsidiary, Beijing WFOE in the Chinese Mainland, entered into a series of contractual arrangements (“VIE agreements”) with Shenzhen Xiaoying, Beijing Ying Zhong Tong, and Shenzhen Xintang (collectively known as “the VIEs”) and their respective shareholders that enable the Company to (1) have power to direct the activities that most significantly affects the economic performance of the VIEs, and (2) receive the economic benefits of the VIEs that could be significant to the VIEs.
F-13
Despite the lack of technical majority ownership, there exists a parent-subsidiary relationship between Beijing WFOE and the VIEs through the aforementioned agreements with the nominee shareholders of the VIEs. The following is a summary of the VIE agreements:
| (1) | Shareholders’ Voting Rights Proxy Agreement: |
Pursuant to the voting rights proxy agreements signed between the VIEs’ nominee shareholders and Beijing WFOE, each nominee shareholder irrevocably appointed Beijing WFOE as its attorney-in-fact to exercise on each shareholder’s behalf and all rights that each shareholder has in respect of its equity interest in the VIEs (including but not limited to executing the exclusive right to the voting rights and the right to appoint directors and executive officers of the VIEs). The nominee shareholders cannot revoke the authorization and entrustment as long as the nominee shareholders remain a shareholder of the VIEs. For the arrangements among Beijing WFOE, each of the VIEs, and their shareholders, the power of attorney will remain in force for ten years. Unless a thirty-day notice is given by Beijing WFOE, this agreement shall be automatically renewed for another one year upon its expiration.The arrangement among Beijing WFOE and its shareholder does not specify its effective term.
| (2) | Spouse Consent Agreement |
Under the spouse consent agreement, each signing spouse acknowledges that the shares of the VIEs held by the relevant shareholder of the VIEs are the personal assets of such shareholder and not jointly owned by the couple. Each signing spouse also unconditionally and irrevocably gives up his or her rights to such shares and any associated economic rights or interests to which he or she may be entitled pursuant to applicable laws and undertakes not to make any assertion of rights to such shares and the underlying assets. Each signing spouse agrees that he or she will not carry out in any circumstances any conduct that are contradictory to the contractual arrangements and this consent agreement.
| (3) | Executive Call Option Agreement: |
Pursuant to the exclusive call option agreement entered into between the VIEs’ nominee shareholders and Beijing WFOE, the nominee shareholders irrevocably granted Beijing WFOE a call option to request the nominee shareholders to transfer or sell any part or all of its equity interests in the VIEs, to Beijing WFOE, or their designees. The purchase price of the equity interests in the VIEs shall be equal to the minimum price required by Chinese Mainland law. Without Beijing WFOE’s prior written consent, the VIEs and its nominee shareholders shall not amend its articles of association, increase or decrease the registered capital, sell or otherwise dispose of its assets or beneficial interest, issue any additional equity or right to receive equity, provide any loans, distribute dividends in any form, etc. For the agreements among Beijing WFOE, each of the VIEs, and their shareholders, these arrangements will remain effective for ten years. Unless notified by Beijing WFOE, the parties to these agreements shall extend the term of these agreements for another ten years. The agreement among Beijing WFOE and its shareholder does not specify its effective term.
| (4) | Exclusive Business Cooperation Agreement: |
Pursuant to the exclusive business cooperation agreement entered into by Beijing WFOE and the VIEs, Beijing WFOE provides exclusive technical support and consulting services in return for fees based on 100% of the VIE’s total consolidated profit, which is adjustable at the sole discretion of Beijing WFOE. Without Beijing WFOE’s consent, the VIEs cannot procure services from any third party or enter into similar service arrangements with any other third party, except for those from Beijing WFOE. For the agreements between Beijing WFOE and each of the VIEs, unless Beijing WFOE terminates these agreements in advance, these agreements will remain effective for ten years. Unless agreed by both parties in writing, this agreement shall be automatically renewed for another ten years upon its expiration.
F-14
| (5) | Equity Pledge Agreement |
Each nominee shareholder of the VIEs has also entered into an equity pledge agreement with Beijing WFOE, pursuant to which each shareholder pledged his/her interest in Beijing WFOE to guarantee the performance of obligations of Beijing WFOE and its shareholders under the exclusive business cooperation agreement, exclusive call option agreement, and shareholders’ voting rights proxy agreement. If the VIEs or any of the nominee shareholder breaches its contractual obligations, Beijing WFOE will be entitled to certain rights and interests regarding the pledged equity interests including the right to dispose the pledged equity interests. None of the nominee shareholders shall, without the prior written consent of Beijing WFOE, assign or transfer to any third party, create or cause any security interest and any liability in whatsoever form to be created on, all or any part of the equity interests it holds in the VIEs. This agreement is not terminated until all of the agreements under the shareholders’ voting rights proxy agreement, exclusive call option agreement and the exclusive business cooperation agreement are fully performed.
The irrevocable power of attorney has conveyed all shareholder rights held by the VIEs’ shareholders to Beijing WFOE or any person designated by Beijing WFOE, including the right to appoint executive directors of the VIEs to conduct day to day management of the VIEs’ businesses, and to approve significant transactions of the VIEs. In addition, the exclusive call option agreement provides Beijing WFOE with a substantive kick-out right of the VIEs shareholders through an exclusive option to purchase all or any part of the shareholders’ equity interest in the VIEs. In addition, through the exclusive business cooperation agreement, Beijing WFOE demonstrates its ability and intention to continue to exercise the ability to absorb substantially all of the profits and all of the expected losses of the VIEs. The equity pledge agreements further secure the obligations of the shareholders of the VIEs under the above agreements.
Based on these contractual arrangements, the Company consolidates the VIEs in accordance with SEC Regulation S-X Rule 3A-02 and Accounting Standards Codification (“ASC”) topic 810 (“ASC 810”), Consolidation.
Uncertainties in the Chinese Mainland legal system could limit the Company’s ability to enforce the contractual arrangements. If the legal structure and contractual arrangements were found to be in violation of Chinese Mainland laws and regulations, the Chinese Mainland government could:
| ● | revoke the Group’s and operating licenses; |
| ● | levy fines on the Group; |
| ● | confiscate any of the Group’s income that they deem to be obtained through illegal operations; |
| ● | shut down the Group’s services; |
| ● | discontinue or restrict the Group’s operations in China; |
| ● | impose conditions or requirements with which the Group may not be able to comply; |
| ● | require the Group to change corporate structure and contractual arrangements; |
| ● | restrict or prohibit the use of the proceeds from overseas offerings to finance the Group’s Chinese Mainland consolidated VIEs’ business and operations; and |
| ● | take other regulatory or enforcement actions that could be harmful to the Group’s business. |
F-15
Consolidated Trusts
As part of the Group’s efforts to develop new product offerings for investors and institutional funding partners, the Group establishes a business relationship with certain trusts which were administered by third-party trust companies. The trusts are set up to invest solely in the loans facilitated by the Group on its platform to provide returns to the beneficiaries of the trusts through interest payments made by the borrowers. The trusts are cooperated with financial institutional cooperators who provide credit insurance/financial guarantee services to protect funding providers against default for both the principal and interest. Both direct model and intermediary model are adopted for these trusts. Under direct model, loans are originated from trusts to borrowers while under intermediary model, the Group typically provides credit to the borrowers through an intermediary first and then transfers the loans to the trusts, which issue beneficial interests to the investors and institutional funding partners. The Group determines to consolidate these trusts as the Group is the primary beneficiary, due to the following reasons: 1) the Group has the power to direct the operating activities of the trusts; 2) the Group absorbs or enjoys the potential residual losses or returns of these trusts. Under intermediary model, the transfer of loans to the Consolidated Trusts are not eligible for sale accounting because the trust is consolidated and the loan transfer is considered an intercompany transaction.
For Consolidated Trusts founded before December 31, 2021, the Group elected to apply fair value option to the loans (at the date of origination) and liabilities due to investors. That is, the loans are continued to be recorded on the Group’s consolidated balance sheets as loans held for investment under “Loans at fair value” and the proceeds received from the investors are recorded as trust liabilities under “Payable to investors at fair value”.
For Consolidated Trusts founded from January 1, 2022, the Group elected not to apply fair value option but instead apply amortized cost method to the loans (at the date of origination) and liabilities due to investors or institutional funding partners, to improve the understandability and relevance of financial information. That is, the loans are continued to be recorded on the Group’s consolidated balance sheets as loans held for investment under “Loans receivable from Xiaoying Credit Loans and other loans, net”, which is net of allowance of credit loss, and the proceeds received from the investors or institutional funding partners are recorded as trust liabilities under “Payable to investors and institutional funding partners at amortized cost”.
During 2022 and 2023, certain of the subsidiaries of the Group funded RMB81,200,000 and RMB115,900,000 to loan products facilitated on the Group’s platform through third-party trust companies. The trusts are consolidated by the Group and the underlying loans are recorded on the Group’s consolidated balance sheets as loans held for investment under “Loans at fair value “ or “Loans receivable from Xiaoying Credit Loans and other loans, net”.
Consolidated Partnerships
The Group continues developing the partnership business model , where the Group and certain trusts jointly established several limited partnership enterprises, or LPs, to invest solely in the loans facilitated by the Group on its platform to provide returns to partners of the LPs through interest payments made by the borrowers. The Consolidated Partnerships are cooperated with financial institutional cooperators who provide credit insurance/financial guarantee services to protect funding providers against default for both the principal and interest. Intermediary model is adopted for the Consolidated Partnerships, the Group typically provides credit to the borrowers through an intermediary first and then transfers the loans to the LPs. The Group determines to consolidate these LPs as the Group is the primary beneficiary, due to the following reasons: 1) the Group has the power to direct the operating activities of the LPs; 2) the Group absorbs or enjoys the potential residual losses or returns of these LPs. The transfer of loans to the Consolidated Partnerships are not eligible for sale accounting because the LP is consolidated and the loan transfer is considered an intercompany transaction. The Group further applies amortized cost to the loans and liabilities to trust partners in its consolidated financial statements. That is, the loans are recorded on the Group’s consolidated balance sheets under “Loans receivable from Xiaoying Credit Loans and other loans, net” and the proceeds received from the trust partners are recorded as LP liabilities under “Payable to investors and institutional funding partners at amortized cost”.
During 2022 and 2023,one of the subsidiaries of the Group funded RMB146,245,430 and RMB231,346,839 to loan products facilitated on the Group’s platform through the limited partnership enterprises. The LPs are consolidated by the Group and the underlying loans are recorded on the Group’s consolidated balance sheets under “Loans receivable from Xiaoying Credit Loans and other loans, net”.
F-16
The following financial statement amounts and balances of the Consolidated Trusts and Partnerships are included in the accompanying consolidated financial statements after elimination of intercompany transactions and balances:
| | | | | | |
| | As of | | | | |
| | December 31, | | As of December 31, | ||
|
| 2022 |
| 2023 |
| 2023 |
| | RMB | | RMB | | US$ |
Assets: | |
| |
| |
|
Restricted cash | | 398,439,250 | | 711,756,581 | | 100,248,818 |
Accounts receivable and contract assets, net | | 37,262,868 | | 54,749,985 | | 7,711,374 |
Loans receivable from Xiaoying Credit Loans and other loans, net | | 2,771,927,123 | | 3,571,283,174 | | 503,004,715 |
Loans at fair value | | 120,279,612 | | — | | — |
Prepaid expenses and other current assets | | 5,073,797 | | — | | — |
Total assets | | 3,332,982,650 | | 4,337,789,740 | | 610,964,907 |
Liabilities: | | | | | | |
Payable to investors and institutional funding partners at amortized cost | | 2,627,910,203 | | 3,584,040,757 | | 504,801,582 |
Payable to investors at fair value | | 141,288,810 | | — | | — |
Other taxes payable | | 3,226,746 | | 4,060,878 | | 571,963 |
Accrued expenses and other current liabilities | | 16,698,946 | | 43,599,849 | | 6,140,910 |
Total liabilities | | 2,789,124,705 | | 3,631,701,484 | | 511,514,455 |
| | | | | | | | |
| | Year ended | | Year ended | | | | |
| | December 31, | | December 31, | | Year ended December 31, | ||
|
| 2021 |
| 2022 |
| 2023 |
| 2023 |
| | RMB | | RMB | | RMB | | US$ |
Net revenue | | 285,859,862 | | 648,893,767 | | 726,005,363 | | 102,255,717 |
Net income | | 105,610,429 | | 360,550,889 | | 458,613,718 | | 64,594,391 |
| | | | | | | | |
| | Year ended | | Year ended | | | | |
| | December 31, | | December 31, | | Year ended December 31, | ||
|
| 2021 |
| 2022 |
| 2023 |
| 2023 |
| | RMB | | RMB | | RMB | | US$ |
Net cash provided by operating activities | | 155,272,678 | | 273,610,963 | | 172,210,364 | | 24,255,322 |
Net cash used in investing activities | | (433,914,047) | | (928,400,322) | | (673,734,777) | | (94,893,559) |
Net cash provided by financing activities | | 14,599,010 | | 840,416,352 | | 814,841,744 | | 114,768,059 |
F-17
The following financial statement amounts and balances of the VIEs and Consolidated Trusts and Partnerships were included in the accompanying consolidated financial statements after elimination of intercompany transactions and balances:
| | | | | | |
| | As of | | | | |
| | December 31 | | As of December 31, | ||
|
| 2022 |
| 2023 |
| 2023 |
| | RMB | | RMB | | US$ |
Assets: | | | | | | |
Cash and cash equivalents | | 116,523,581 | | 295,277,830 | | 41,589,013 |
Restricted cash | | 403,439,250 | | 716,870,052 | | 100,969,035 |
Accounts receivable and contract assets, net | | 65,289,514 | | 83,535,036 | | 11,765,664 |
Loans receivable from Xiaoying Credit Loans and other loans, net | | 3,777,595,492 | | 4,876,731,346 | | 686,873,244 |
Loans at fair value | | 120,279,612 | | — | | — |
Prepaid expenses and other current assets, net | | 53,328,083 | | 25,280,941 | | 3,560,746 |
Deferred tax assets, net | | 2,277,314 | | 118,587,356 | | 16,702,680 |
Long-term investments | | 495,994,880 | | 493,411,355 | | 69,495,536 |
Property and equipment, net | | 604,992 | | 1,054,565 | | 148,532 |
Intangible assets, net | | 28,711,872 | | 28,153,262 | | 3,965,304 |
Loan receivable from Xiaoying Housing Loans, net | | 10,061,258 | | 8,656,846 | | 1,219,291 |
Income taxes receivable | | 1,870,729 | | — | | — |
Other non-current assets | | 2,469,629 | | 22,984 | | 3,237 |
Total assets | | 5,078,446,206 | | 6,647,581,573 | | 936,292,282 |
Liabilities: | | | | | | |
Payable to investors and institutional funding partners at amortized cost | | 2,627,910,203 | | 3,584,040,757 | | 504,801,582 |
Payable to investors at fair value | | 141,288,810 | | — | | — |
Financial guarantee derivative | | 107,890,394 | | — | | — |
Short-term borrowings | | 20,000,000 | | 320,000,000 | | 45,071,057 |
Accrued payroll and welfare | | 12,047,490 | | 15,011,080 | | 2,114,266 |
Other taxes payable | | 123,105,603 | | 126,900,881 | | 17,873,615 |
Income taxes payable | | — | | 28,266,791 | | 3,981,294 |
Accrued expenses and other current liabilities | | 102,148,275 | | 69,989,510 | | 9,857,816 |
Other non-current liabilities | | 1,937,009 | | — | | — |
Total liabilities | | 3,136,327,784 | | 4,144,209,019 | | 583,699,630 |
| | | | | | | | |
| | Year ended | | Year ended | | | | |
| | December 31, | | December 31, | | Year ended December 31, | ||
|
| 2021 |
| 2022 |
| 2023 |
| 2023 |
|
| RMB | | RMB |
| RMB |
| US$ |
Net revenue | | 1,388,255,858 | | 1,350,809,649 | | 1,500,275,059 | | 211,309,323 |
Net income | | 695,892,749 | | 738,032,308 | | 438,091,276 | | 61,703,866 |
| | | | | | | | |
| | Year ended | | Year ended | | | | |
| | December 31, | | December 31, | | Year ended December 31, | ||
|
| 2021 |
| 2022 |
| 2023 |
| 2023 |
| | RMB | | RMB | | RMB | | US$ |
Net cash provided by operating activities | | 485,090,529 | | 151,675,178 | | 51,412,210 | | 7,241,258 |
Net cash used in investing activities | | (702,678,519) | | (925,707,537) | | (674,068,903) | | (94,940,619) |
Net cash provided by (used in) financing activities | | (4,100,990) | | 860,416,352 | | 1,114,841,744 | | 157,022,176 |
The VIEs and Consolidated Trusts and Partnerships contributed 38%, 38% and 31% of the Group’s consolidated revenue for the years ended December 31, 2021, 2022 and 2023 , respectively. As of December 31, 2022 and 2023, the VIEs and Consolidated Trusts and Partnerships accounted for an aggregate of 57% and 57% of the consolidated total assets, and 77% and 71% of the consolidated total liabilities.
There are no terms in any arrangements, considering both explicit arrangements and implicit variable interests that require the Company or its subsidiaries to provide financial support to the VIEs and Consolidated Trusts and Partnerships. However, if the VIEs were ever to need financial support, the Group may, at its option and subject to statutory limits and restrictions, provide financial support to its VIEs through loans to the shareholders of the VIEs or entrustment loans to the VIEs.
F-18
The Group believes that there are no assets held in the VIEs that can be used only to settle obligations of the VIEs, except for registered capital and the Chinese Mainland statutory reserves. As the VIEs are incorporated as limited liability companies under the Company Law of the PRC, creditors of the VIEs do not have recourse to the general credit of the Company for any of the liabilities of the VIEs. Relevant Chinese Mainland laws and regulations restrict the VIEs from transferring a portion of their net assets, equivalent to the balance of its statutory reserve and its share capital, to the Company in the form of loans and advances or cash dividends. Please refer to Note 17 for disclosure of restricted net assets.
(c)Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ materially from such estimates. Significant accounting estimates reflected in the Group’s consolidated financial statements include share-based compensation, allowance for credit losses of accounts receivables and contract assets, deposits to institutional cooperators, prepaid expenses and other current assets, loans receivables from Xiaoying Housing Loans and loans receivable from Xiaoying Credit Loans and other loans, provision for contingent guarantee liabilities, allocation of considerations under revenue arrangements with various performance obligations, variable considerations of revenue recognition, valuation allowance for deferred tax assets, unrecognized tax benefits, the indefinite reinvestment assertion, fair value of financial guarantee derivatives, guarantee liabilities and financial investments, loans at fair value and payable to investors at fair value, impairment of long-term investments and financial investments.
(d)Revenue recognition
The Group provides services as an online marketplace connecting borrowers and investors or institutional funding partners. Revenue is the transaction price the Group expects to be entitled to in exchange for the promised services in a contract in the ordinary course of the Group’s activities and is recorded net of value-added tax (“VAT”). The services to be accounted for include loan facilitation service, post-origination service (e.g., cash processing and collection services) and financial guarantee service.
The major product offered by the Group is Xiaoying Credit Loan, which mainly consists of Xiaoying Card Loan, Xiaoying Preferred Loan and other unsecured loan products that the Group introduce from time to time. The major products offered by the Group before 2021 also include Xiaoying Revolving Loan which mainly consists of Yaoqianhua (previously named as Xiaoying Wallet). The Group ceased facilitation of Xiaoying Preferred Loan in 2019, and ceased facilitation of Xiaoying Revolving Loan in 2020.
The Group provides services primarily through the use of two business models. The first business model (“Direct Model”) involves the Group matching borrowers with investors or institutional funding partners who directly funds the credit drawdowns to the borrowers. The Group has determined that it is not the legal lender or borrower in the loan origination and repayment process, but acting as an intermediary to bring the lender and the borrower together. Therefore, the Group does not record the loans receivable or payable arising from the loans facilitated between the investors or institutional funding partners and borrowers on its platform.
The second business model (“Intermediary Model”) involves the Group initially providing credit to borrowers through an intermediary and subsequently selling the loans including all of the creditor rights in the loans to external investors or institutional funding partners on its platform within a short period of time.
Loans facilitated by the Group typically have a term of less than 1 year. For each loan facilitated either through the Direct Model or Intermediary Model, the Group charges a service fee (i) from the borrower indirectly through one of the Group’s VIEs, Shenzhen Xintang, or (ii) from the borrower indirectly through external financing guarantee company, or (iii) from institutional funding partner directly. No application fee is charged to borrowers or investors or institutional funding partners.
For the loans the Group is entitled to the full service fee regardless of whether the borrowers choose to early repay or not, the Group has the unconditional right to the consideration.
F-19
For the loans facilitated that the Group collected service fees indirectly through Shenzhen Xintang, when borrowers who have the option of early repayment and upon termination, they do not have the obligation to pay the remaining monthly service fees, the Group’s right to consideration for the service fees of facilitation service is conditional on whether or not the borrowers repay in advance. At contract inception, the Group determines the consideration based on historical experiences as well as the credit due diligence performed on each borrower prior to loan origination.
For the loans facilitated that the Group collected service fee indirectly through external financing guarantee company or directly from institutional funding partner, the Group’s transaction price includes variable consideration in the form of default risk of the borrowers and prepayment risk of the borrowers. The Group determines the consideration based on historical experiences as well as the credit due diligence performed on each borrower prior to loan origination.
The Group provides guarantee which is directly provided to or indirectly provided through financial institutional cooperators to investors or institutional funding partners on certain loan products via its consolidated entities. The Group is compensated for this reimbursement from the contractual service fees collected from the borrowers. If a borrower defaults, the Group makes its best efforts to collect the default loan. The Group directly makes payment to the defaulted principal and interest to investors or indirectly makes payment to investors or institutional funding partners through institutional cooperators, and deemed the guarantee as a guarantee service to the investors or institutional funding partners and recognizes a stand ready obligation for its guarantee exposure in accordance with ASC Topic 460, Guarantees which requires the guarantee to be measured initially at fair value based on the stand-ready obligation.
For certain loan products that the Group facilitate in the past that are repaid in installments by borrowers, borrowers are required to enter into guarantee agreements with the Group to pay the guarantee fee at a pre-agreed rate while at the same time, the Group entered into a series of arrangements with various financial institutional cooperators and negotiate the upper limit (the “Cap”) of Shenzhen Xintang (VIE)’s compensation obligation prospectively with these financial institutional cooperators based on the expected loss rate. Upon borrower’s default, financial institutional cooperators reimburse the full loan principal and interest to the investors or institutional funding partner first, and has the right to recourse to both the borrower and the Group, and the Group’s contractual obligation is at any time it limited to the Cap which is the lower of (1) total amount of guarantee fees contractually required to be collected from the borrowers for such loans facilitated during the current period on an aggregated basis, and (2) a certain percentage of the total principal of the loans facilitated stated in an annualized manner, as pre-agreed with financial institutional cooperators (the “Rate”). The contractual guarantee fees in (1) is not influenced by default or early repayment of borrowers. The Group has no obligation or intention to compensate financial institutional cooperators for any losses in excess of the contractual obligation. The Rate will be negotiated prospectively at each quarter between the two parties based on the expected loss rate. The actual loss in excess of the Cap is absorbed by financial institutional cooperators. Financial institutional cooperators ultimately bear substantially all of the credit risk. The Group’s exposure in this arrangement is limited to the default and prepayment risk in relation to the guarantee fee when the Group cannot collect the guarantee fee under the agreement with the borrower on an individual basis but is still obligated to compensate financial institutional cooperators up to the Cap on a pool basis. The Group evaluated the guarantee arrangement pursuant to ASC Topic 815, and concluded that the arrangement meets the definition of a derivative and that it is not eligible for the guarantee scope exception. Therefore, the guarantee is recognized as a derivative liability/asset at fair value and is not accounted for pursuant to ASC Topic 460 or 450. See accounting policy for financial guarantee derivative.
Direct Model
The Group has adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606) and all subsequent ASUs that modified ASC 606.
The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, the Group applies the following steps:
| ● | Step 1: Identify the contract (s) with a customer |
| ● | Step 2: Identify the performance obligations in the contract |
| ● | Step 3: Determine the transaction price |
F-20
| ● | Step 4: Allocate the transaction price to the performance obligations in the contract |
| ● | Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation |
The Group determines its customers to be both the borrowers and the investors or institutional funding partners. The Group considers the loan facilitation service and post-origination service as two separate performance obligations under ASC 606, as these two deliverables are distinct in that customers can benefit from each service on its own and the Group’s promises to deliver the services are separately identifiable from each other in the contract. While the post-origination service is within the scope of ASC Topic 860, the ASC Topic 606 revenue recognition model is applied due to the lack of definitive guidance in ASC Topic 860.
The Group determines the total transaction price to be the service fees chargeable from the borrowers indirectly through one of the VIEs, Shenzhen Xintang, or external financing guarantee companies or from certain institutional funding partners directly, including the guarantee fees charged by the Group under the separate guarantee agreement with the borrowers for certain type of Xiaoying Card Loans. The transaction price for loan facilitation and post-origination services includes variable consideration in the form of default risk and prepayment risk of the borrowers. The Group estimates variable consideration for these contracts using the expected value methodology, including models to estimate the loss rates, the prepayment rates, and the weighted macroeconomic forecast, which are based on past events, current conditions, and reasonable and supportable forecasts over the life of the loans. The expected value of the consideration is the product of multiplying the loan principal and the pre-agreed service fee rates, adjusted for the loss rates and the prepayment rates. The loss rates are calculated using vintage-based loss rate model, adjusted for a weighted macroeconomic forecast. The models consider the historical loss experience period for the vintage-based loss rates, the historical prepayment experience period for the prepayment rates and the weighting of multiple macroeconomic forecast scenarios over the life of the loans and selected economic variables, including gross domestic product (GDP), unemployment rate and other macro-economic variables. The transaction price is allocated amongst the financial guarantee service, if any, and two performance obligations.
The Group first allocates the transaction price to the financial guarantee, if any, that is recognized in accordance with ASC Topic 815, which requires the guarantee to be measured initially and subsequently at fair value. Then the remaining considerations are allocated to the loan facilitation services and post-origination services using their relative standalone selling prices consistent with the guidance in ASC 606. The Group does not have observable standalone selling price information for the loan facilitation services or post-origination services because it does not provide loan facilitation services or post-origination services on a standalone basis. There is no direct observable standalone selling price for similar services in the market that is reasonably available to the Group. As a result, the estimation of standalone selling price involves significant judgment. The Group uses an expected cost plus margin approach to estimate the standalone selling prices of loan facilitation services and post origination services as the basis of revenue allocation. In estimating its standalone selling price for the loan facilitation services and post-origination services, the Group considers the cost incurred to deliver such services, profit margin for similar arrangements, customer demand, effect of competitors on the Group’s services, and other market factors.
For each type of service, the Group recognizes revenue when (or as) the entity satisfies the service/performance obligation by transferring a promised good or service (that is, an asset) to a customer. Revenues from loan facilitation are recognized at the time a loan is originated between the borrower and the investor or institutional funding partner and the principal loan balance is transferred to the borrower, at which time the facilitation service is considered completed. Revenues from post-origination services are recognized on a straight-line basis over the term of the underlying loans as the services are provided. The collection of service fees is not conditional on the provision of subsequent post-origination services.
Intermediary Model
The Group cooperates with several microcredit companies who use their own funds to provide credit to borrowers first; the Group provide facilitation and post-origination services for these loans and receive service fee from borrowers. These microcredit companies transfer their rights as creditors shortly to SPVs controlled by the Group at the price of the carrying amount of the outstanding loan principal balance and accumulated accrued interest not paid by the borrowers as of the day on which the creditor’s rights are legally transferred to SPVs. The SPVs usually further transfer their creditor’s rights to third party investors or institutional funding partners in a short period at the price of the carrying amount of the outstanding loan principal balance and the accumulated accrued interest not paid by the borrowers as of the day on which the creditor’s rights are legally transferred to investors or institutional funding partners. The Group continues the operations through the Intermediary Model with funding from unrelated third-party trust companies to the extent permitted under applicable laws and regulations.
F-21
The loans are initially recorded on the consolidated balance sheet as loans receivable from Xiaoying Credit Loans and other loans. These loans carry the same insurance/ guarantee agreement with external financial institutional cooperators as loans facilitated under the Direct Model, which is attached to the loan and transfers along with the loan. The Group also charges service fees in the same manner as loans facilitated under the Direct Model. The Group accounts the relevant interest and service fees received from the borrowers as the financing income and the fee charged by the microcredit companies which is proportionate to the loans facilitated as the origination and servicing cost in its consolidated financial statements.
Intermediary Model—Trust Model
The transfer of loans to institutional funding partners under the Intermediary Model often involves transferring the loans to a trust formed and operated by unrelated third-party trust companies. The Group consolidates such trusts under the VIE model (see accounting policy on “Consolidated Trusts”). Loans transferred to Consolidated Trusts do not qualify for sales accounting as the transfer is to a consolidated subsidiary.
Before December 31, 2021, the Group elected to apply fair value option to these loans at the date of origination. The loans are recorded as “Loans at fair value” in the consolidated balance sheets.
From January 1, 2022, the Group elected to apply amortized cost method to the loans of newly formed Consolidated Trusts at the date of origination. For loan assets measured at amortized cost, they are recorded as “Loans receivable from Xiaoying Credit Loans and other loans, net”.
Under both methods, the Group recognizes as revenue under “Financing income” the service fees and interests charged to the borrowers over the lifetime of the loans using effective interest method.
Intermediary Model—Partnership Model
The transfer of loans to institutional funding partners under the Intermediary Model involves transferring the loans to a limited partnership enterprise, or LP, formed and operated by unrelated third-party trust companies and the Group. The Group consolidates such partnerships under the VIE model (see accounting policy on “Consolidated Partnerships”). The Group elects to measure these loans at amortized cost at the time of origination. Loans transferred to Consolidated Partnerships do not qualify for sales accounting as the transfer is to a consolidated subsidiary. The loans are recorded as “Loans receivable from Xiaoying Credit Loans and other loans, net” in the consolidated balance sheets. The Group recognizes as revenue under “Financing income” the service fees and interests charged to the borrowers over the lifetime of the loans using effective interest method.
F-22
Disaggregation of revenues
All of the Group’s revenue for the years ended December 31, 2021, 2022 and 2023 were generated from the PRC. As the remaining duration of the Group’s performance obligations of the contracts is one year or less, the Group elects to apply the exemption of disclosing the aggregate amount of transaction price allocated to the performance obligations at the end of 31 December, 2021, 2022 and 2023, The following table illustrates the disaggregation of revenue by product the Group offered in 2021, 2022 and 2023:
| | | | | | | | | | |
| | Loan | | | | | | | | |
| | facilitation | | Post-origination | | Financing | | Other | | |
| | service | | service | | income | | revenue | | Total |
2021 |
| (RMB) |
| (RMB) |
| (RMB) |
| (RMB) |
| (RMB) |
Major products |
|
|
|
|
|
|
|
|
|
|
Xiaoying Credit Loan |
| 2,545,592,949 | | 312,373,187 | | 644,009,587 | | 31,877,690 | | 3,533,853,413 |
Xiaoying Revolving Loan |
| — | | 3,216,931 | | 27,891,908 | | 537,311 | | 31,646,150 |
Other loans |
| — | | — | | — | | 130,768 | | 130,768 |
Other service(1) | | — | | — | | — | | 60,834,774 | | 60,834,774 |
Total |
| 2,545,592,949 | | 315,590,118 | | 671,901,495 | | 93,380,543 | | 3,626,465,105 |
| | | | | | | | | | |
| | Loan | | | | | | | | |
| | facilitation | | Post-origination | | Financing | | Other | | |
| | service | | service | | income | | revenue | | Total |
2022 |
| (RMB) |
| (RMB) |
| (RMB) |
| (RMB) |
| (RMB) |
Major products | |
| |
| |
| |
| |
|
Xiaoying Credit Loan | | 2,044,343,554 | | 372,015,426 | | 959,446,184 | | 20,815,986 | | 3,396,621,150 |
Xiaoying Revolving Loan | | — | | 435,180 | | 2,815 | | — | | 437,995 |
Other loans | | — | | — | | 6,828,467 | | 207,964 | | 7,036,431 |
Other service(1) | | — | | — | | — | | 158,854,539 | | 158,854,539 |
Total | | 2,044,343,554 | | 372,450,606 | | 966,277,466 | | 179,878,489 | | 3,562,950,115 |
| | | | | | | | | | | | |
| | Loan | | | | | | | | | | |
| | facilitation | | Post-origination | | Financing | | Guarantee | | Other | | |
| | service | | service | | income | | income | | revenue | | Total |
2023 |
| (RMB) |
| (RMB) |
| (RMB) |
| (RMB) |
| (RMB) |
| (RMB) |
Major products | |
| |
| |
| |
| |
| |
|
Xiaoying Credit Loan | | 2,740,974,233 | | 596,581,987 | | 1,133,314,422 | | 24,496,658 | | 30,861,036 | | 4,526,228,336 |
Xiaoying Housing Loan | | — | | — | | — | | — | | 1,601,289 | | 1,601,289 |
Other loans | | — | | — | | 4,022,032 | | — | | — | | 4,022,032 |
Other service(1) | | — | | — | | — | | — | | 283,032,373 | | 283,032,373 |
Total | | 2,740,974,233 | | 596,581,987 | | 1,137,336,454 | | 24,496,658 | | 315,494,698 | | 4,814,884,030 |
| | | | | | | | | | | | |
| | Loan | | | | | | | | | | |
| | facilitation | | Post-origination | | Financing | | Guarantee | | Other | | |
| | service | | service | | income | | income | | revenue | | Total |
2023 |
| (US$) |
| (US$) |
| (US$) |
| (US$) |
| (US$) |
| (US$) |
Major products | | | | | | | | | | | | |
Xiaoying Credit Loan |
| 386,058,146 | | 84,026,815 | | 159,623,998 | | 3,450,282 | | 4,346,686 | | 637,505,927 |
Xiaoying Housing Loan |
| — |
| — | | — | | — | | 225,537 | | 225,537 |
Other loans |
| — |
| — |
| 566,491 |
| — |
| — |
| 566,491 |
Other services(1) |
| — |
| — |
| — |
| — |
| 39,864,276 |
| 39,864,276 |
Total |
| 386,058,146 | | 84,026,815 | | 160,190,489 | | 3,450,282 | | 44,436,499 | | 678,162,231 |
F-23
Contract balances
The Group did not enter into contracts with customers that were greater than one year for substantially all products for the years ended December 31, 2021, 2022 and 2023. For the loans the Group is entitled to the full service fee regardless of whether the borrowers choose to early repay or not, the Group has the unconditional right to the consideration and an accounts receivable is recorded. For the loans facilitated with borrowers who have the option of early repayment and upon termination they do not have the obligation to pay the remaining monthly service fees, the Group’s right to consideration for the service fees of facilitation service is conditional on whether or not the borrowers repay in advance. In these instances, the Group records a corresponding contract asset when recognizing revenue from loan facilitation service. The contract asset will not be reclassified to a receivable given that the right to invoice and the payment is due by the end of the credit periods. Revenue for these loan products are recognized when the collection of consideration becomes probable.
Remaining unsatisfied performance obligations as of December 31, 2021, 2022 and 2023 pertained to post-origination service in the amount of RMB113,840,873, RMB224,461,482 and RMB287,607,599 (US$40,508,683), respectively. All remaining unsatisfied performance obligations would be recognized as revenue in the subsequent year.
Financing income
Financing income consists primarily the financing fees the Group charges for the loans facilitated through the Consolidated Trusts and Consolidated Partnerships, including interest income and service fees generated from providing loan facilitation and post-origination services to the investors and institutional funding partners of the Consolidated Trusts and Consolidated Partnerships, and are recorded as revenue over the life of the underlying financing using the effective interest method.
Financing income also includes financing fees, including interest income and service fee, from loans receivables from Xiaoying Credit Loans and other loans that have not yet been transferred to external investors or institutional funding partners or have been transferred but such transaction does not qualify for sale accounting under the Intermediary Model.
Starting from 2021, financing income also includes interest income generated from providing loans by the Group’s own fund from microcredit business, and are recorded as revenue over the life of the underlying financing using the effective interest method. The Group maintains the right to terminate the contract in advance based on the credit due diligence performed on each borrower. The remaining installments of interest would be recognized on non-accrual status after the contract terminated.
Other revenue
Other revenue primarily includes referral service fees for introducing borrowers to other platforms, technology service fees received for providing assistant technology development services and penalty fees for loan late payment. The referral service fees for introducing borrowers to other platforms are recognized when the obligation is fulfilled and is confirmed by the other platforms. The technology service fees are recognized when the assistant technology development services to third parties provided. The penalty fees, which are fees paid to the Group, will be received as a certain percentage of past due amounts in the case of late payments. Penalty fees are contingency-based variable considerations and constrained by the occurrence of delinquency. They are recognized when the uncertainty associated with the variability is resolved, that is, when the underlying event occurs.
(e)Sales and transfers of financial instruments
Sales and transfers of financial instruments are accounted under authoritative guidance for the transfers and servicing of financial assets and extinguishment of liabilities. Specifically, a transfer of a financial asset, a group of financial assets, or a participating interest in a financial asset is accounted for as a sale only if all the following conditions are met:
F-24
Under the Intermediary Model, the Group, through its intermediary, facilitates credits to borrowers and subsequently transfers the loans (including the creditor rights) to third party investors or institutional funding partners at face value within a short period of time.
When the loan (including the creditor rights) is transferred, the transferee becomes the direct counterparty to the borrower and the legal record holder of the loan upon transfer. The transfer is accounted for as a sale, when (1) the transferred loans are considered legally isolated from the assets of the Group and its creditors even in the bankruptcies under the Chinese Mainland laws and regulations, (2) the investors or institutional funding partners (transferees) can freely pledge or exchange the transferred loans, and (3) the Group does not maintain effective control over the transferred loans. When a transfer does not qualify for sale accounting, e.g. when the Group sells loans with recourse to the Group, the transferred financial asset remains in the statement of financial position and a financial liability is recognized for any consideration received.
For Xiaoying Housing Loans facilitated through the Intermediary Model, borrowers are required to pledge properties to one of the Group’s consolidated VIE entities (other than the intermediary or the SPV conducting the facilitation and transfer of the loan) as collateral for the guarantee that the Group is providing to a financial institutional cooperator against borrower’s default. It is a separate arrangement with different counterparties from the loan provided by the Group. While the loan (including creditor’s rights) is transferred to third party investors or institutional funding partners, the lien remains under the Group’s name and in security for the Group agreeing to provide the guarantee to a financial institutional cooperator. The holding of the lien does not affect the creditor’s right in the loan being fully transferred. Provided all aforementioned conditions under sales accounting are met, the transfer of such loans with collateral are accounted for as a sale. The Group ceased facilitation of Xiaoying Housing Loan in 2019.
(f)Foreign currency translation
The functional currency of X Financial is in US dollars (“US$”). The functional currency of the Group’s subsidiaries and VIEs in the Chinese Mainland is Renminbi (“RMB”). The determination of the respective functional currency is based on the criteria stated in ASC 830, Foreign Currency Matters. The Group also uses RMB as its reporting currency. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at the rates of exchange ruling at the balance sheet date. Transactions in currencies other than the functional currency are measured and recorded in the functional currency at the exchange rate prevailing on the transaction date. Translation gains and losses are recognized in the statements of comprehensive income (loss).
The Company with functional currency of US$ translates its operating results and financial positions into RMB, the Group’s reporting currency. Assets and liabilities are translated using the exchange rates in effect on the balance sheet date. Equity amounts are translated at historical exchange rates. Revenues, expenses, gains and losses are translated using the average rates for the year. Translation adjustments are reported as cumulative translation adjustments and are shown as a separate component in the statements of comprehensive income (loss).
(g)Guarantee liabilities
The Group has guarantee service which is directly provided to or indirectly provided through financial institutional cooperators to investors or institutional funding partners. If a borrower defaults, the Group makes its best efforts to collect the default loan. The Group directly or indirectly makes payment to the defaulted principal and interest to investors or institutional funding partners.
F-25
Prior to September 2017, substantially all of the loans facilitated by the Group’s platform are insured by a financial institutional cooperator. The financial institutional cooperator initially reimbursed the loan principal and interest to the investor or institutional funding partner upon the borrower’s default. In order to maintain stable business relationship with the financial institutional cooperater, although not contractually obligated, the Group at its sole discretion compensated the financial institutional cooperater for substantially all loan principal and interest default but not subsequently collected. The Group deemed the guarantee as a guarantee service recognizes a stand ready obligation for its guarantee exposure in accordance with ASC Topic 460. The relative business has been ceased in 2020 with no outstanding balance of guarantee liabilities as of December 2021 and 2022, and only follow-up collections remains.
From September 2017, the Group revised the arrangement with the financial institutional cooperator and the Group no longer records any guarantee liabilities in accordance with ASC Topic 460, and records financial guarantee derivatives in accordance with ASC 815. See accounting policy of revenue recognition and financial guarantee derivatives.
During 2023, the Group started the financing guarantee business through one of the subsidiaries of the Group that holds the financing guarantee license and bulit a new business model that collaborates with external financing guarantee companies to provide joint guarantee services, on a pro-rata basis, to institutional funding partners. Under this business model, the Group has the contractual obligation to pay the defaulted principal and interest to institutional funding partners and no obligation to pay to the external financing guarantee company. The Group recognizes a stand ready obligation for its guarantee exposure in accordance with ASC Topic 460, Guarantees which requires the guarantee to be measured initially at fair value based on the stand-ready obligation.
Guarantee service provided prior to September 2017
At the inception of each loan, the Group recognizes the guarantee liability at fair value in accordance with ASC 460-10, which incorporates the expectation of potential future payments under the guarantee and takes into both non-contingent and contingent aspects of the guarantee. Subsequent to the loan’s inception, the guarantee liability is composed of two components: (i) ASC Topic 460 component; and (ii) ASC Topic 450 component. The liability recorded based on ASC Topic 460 is determined on a loan by loan basis and it is reduced when the Group is released from the underlying risk, i.e. as the loan is repaid by the borrower or when the investor or institutional funding partner is compensated in the event of a default. This component is a stand-ready obligation which is not subject to the probable threshold used to record a contingent obligation. When the Group is released from the stand-ready liability upon expiration of the underlying loan, the Group records a corresponding amount as “Other revenue” in the consolidated statement of comprehensive income. The other component is a contingent liability determined based on probable loss considering the actual historical performance and current conditions, representing the obligation to make future payouts under the guarantee liability in excess of the stand-ready liability, measured using the guidance in ASC Topic 450. The ASC Topic 450 contingent component is determined on a collective basis and loans with similar risk characteristics are pooled into cohorts for purposes of measuring incurred losses. The ASC 450 contingent component is recognized as part of operating expenses in the consolidated statement of comprehensive income. At all times the recognized liability (including the stand-ready liability and contingent liability) is at least equal to the probable estimated losses of the guarantee portfolio.
The Group measures its guarantee liabilities at inception at fair value based on the Group’s expected payouts and also incorporating a markup margin. As the Group’s guarantee liabilities are not traded in an active market with readily observable prices, the Group applies a discounted cash flow methodology to measure the fair value of guarantee liabilities. The impact of credit losses is also considered by applying discounted cash flow method for the subsequent measurement of guarantee liabilities, based on the consideration of reasonable and supportable forecasts of future economic conditions. The significant unobservable inputs used include expected future payout and discount rate. The expected future payouts were estimated based on expected loss rates for each product type, taking into consideration of historical loss experiences for both contingent and noncontingent elements. The expected future payouts take into account missed payments initially compensated by the financial institutional cooperator within two business days from borrowers’ payment due date. The expected collection rate of defaulted loans incorporates the proceeds from liquidation of underlying collateral that would be expected to cover the payouts under the guarantee and was based on the average historical collection rate of the Group’s products. These inputs in isolation can cause significant increases or decreases in fair value. Increase in the expected net loss rates can significantly increase the fair value of guarantee liabilities; conversely a decrease in the expected net loss rates can significantly decrease the fair value of guarantee liabilities. The discount rate applied discounted cash flow methodology to present value the projected cash flows which is based on market rates. The Group also estimated the markup margin by looking at several comparable business models. The approximate term of the guarantee service correlates directly with the term of the loan product.
F-26
Guarantee service provided in and after 2023
At initial recognition, deferred guarantee income is recorded at the fair value of the guarantee contract. Deferred guarantee income represents the stand ready component of the guarantee contracts that are determined in accordance with ASC Topic 460. The Group apply practical expedient and measures its guarantee service at inception at fair value equal to the total amount of guarantee service fees contractually required to be collected, since the guarantee contact is independently issued in a standalone arm’s-length transaction with an unrelated party. Subsequent to initial recognition, deferred guarantee income is released systematically as “Guarantee income” in the consolidated statement of comprehensive income when the Group is released from the underlying risk. Contingent component represents the expected lifetime credit losses of the guarantee contract that are determined in accordance with ASC Topic 326, which are initially recorded separate from and in addition to deferred guarantee income at the amount equal to the expected lifetime credit losses of the underlying loans covered by the guarantee service. The expected credit losses is calculated using vintage-based loss rate and macroeconomic forecast scenario models, and is the product of multiplying the estimates of vintage-based loss rates and the individual level exposure at default on an undiscounted basis, adjusted for a weighted macroeconomic forecast. The models consider the historical loss experience period for the vintage-based loss rates, the historical prepayment experience period for the prepayment rates and the weighted multiple macroeconomic forecast scenarios over the life of the loans and selected economic variables, including gross domestic product (GDP), unemployment rate and other macro-economic variables. The contingent component is determined on a collective basis and loans share similar risk characteristics and includes both quantitative and qualitative components, and adjusted each period for changes in expected lifetime credit losses. The initial recognition and adjustments made to guarantee liabilities are recorded as “provision for contingent guarantee liabilities” in the consolidated statement of comprehensive income.
(h)Financial guarantee derivatives
Starting from September 2017, for newly facilitated Xiaoying Credit Loans and Xiaoying Revolving Loans, the Group entered into a series of arrangements with various financial institutional cooperators in which it has agreed that the Group’s exposure is limited to the contractual guarantee fee that the Group cannot collect under the agreement from the borrower as a result of default or prepayment but are still obligated to compensate those financial institutional cooperators based on the contractual guarantee fee up to the pre-agreed cap. The relative business has been ceased in 2023. See accounting policy in Revenue Recognition. The financial guarantee is accounted for as a derivative under ASC 815 because the financial guarantee scope exemption in ASC 815-10-15-58 is not met. The derivative is remeasured at each reporting period. The change in fair value of the derivative is recorded as a change in fair value of financial guarantee derivatives in the consolidated statements of comprehensive income(loss). The derivative is increased by the guarantee fees collected from the borrowers upon receipt as the Group expects all the fees to be ultimately paid to those financial institutional cooperators. When the Group settles the guarantee through performance of the guarantee by making payments to those financial institutional cooperators, the Company records a corresponding deduction to the derivative.
The Group uses the discounted cash flow model to value these financing guarantee derivatives at inception and subsequent valuation dates. This discounted cash flow model incorporates assumptions such as the expected delinquency rates, prepayment rate and discount rate. The expected delinquency rate and prepayment rate is estimated by taking into consideration of historical loss experiences. The discount rate is determined based on the market rates. The Group considers that the impact of discount rate to the fair value of financial guarantee derivatives is immaterial.
(i)Fair value
Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Group considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.
Authoritative literature provides a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The level in the hierarchy within which the fair value measurement in its entirety falls is based upon the lowest level of input that is significant to the fair value measurement as follows:
| ● | Level 1—inputs are based upon unadjusted quoted prices for identical assets or liabilities traded in active markets. |
F-27
| ● | Level 2—inputs are based upon quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
| ● | Level 3—inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. Most fair value is therefore determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques. |
(j)Cash and Cash Equivalents
Cash and cash equivalents primarily consist of cash on hand and cash in bank which are highly liquid and insignificant risk of changes in value. As of December 31, 2022 and 2023, cash equivalents were comprised of term deposits in banks and three-month U.S. treasury bills. All cash and cash equivalents are unrestricted as to withdrawal and use.
(k)Restricted Cash
Restricted cash consists primarily of cash held by the Consolidated Trusts and Partnerships through segregated bank accounts which can only be used by the Consolidated Trusts and Partnerships to specified activities as stipulated in the Consolidated Trust or Partnership agreements. Cash in the Consolidated Trusts and Partnerships is not available to fund the general liquidity needs of the Group.
Restricted cash also includes cash security deposits set aside in banks. Restriction on the use of such cash and the interest earned thereon is imposed by the banks.
Tianjin Yuexin enterd into deposit arrangements with institutional funding partners to pay deposits in accordance with an agreed payment schedule. The Group establishes an allowance for credit losses based on the credit risk of institutional funding partners determined by external credit ratings and adjusted for a weighted macroeconomic forecast.
(l) Accounts receivable and contract assets, net
Accounts receivable and contract assets consist of accounts receivable and contract assets from the facilitation and post-origination service in relation to loans facilitated under both Direct and Intermediary Models, from financing income generated from Consolidated Trusts and Partnerships and Xiaoying Microcredit, from guarantee income generated under a new business model of financing guarantee business, and from other revenue which mainly including referral service fees. Contract assets represent the Group’s right to consideration in exchange for facilitation services that the Company has transferred to the customer before payment is due. The Group only recognizes accounts receivable and contract assets to the extent that the Group believes it is probable that they will collect substantially all of the consideration to which it will be entitled in exchange for the services transferred to the customer the payment is due by the end of the credit periods. The general life time of accounts receivable and contract assets lasts no more than 12 months.
Accounts receivable and contract assets from facilitation service and financing income is stated at the historical carrying amount net of write-offs and allowance for credit losses. The Group establishes an allowance for credit losses in accordance with ASC 326 based on estimates, historical experience of net loss rates, current economic conditions, reasonable and supportable forecasts of future economic conditions and other factors surrounding the credit risk of customers. The profile of the borrowers is similar under each product therefore the Group applies a consistent credit risk management framework to the entire portfolio of borrowers under each product. The Group also constantly monitors the financial condition and evaluates the credit quality of certain institutional funding partners and external financing guarantee companies from which the Group’s service fees are collected directly or indirectly. For individual counterparty where there is an observable indicator of loss, an individually evaluated allowance for credit losses is provided. The Group evaluates and adjusts its allowance for credit losses for accounts receivable and contract assets on a quarterly basis or more often as necessary. Uncollectible accounts receivable or contract assets are charged off when a settlement is reached for an amount that is less than the outstanding historical balance or when accounts receivable or contract assets are deemed uncollectible.
F-28
The following table presents the accounts receivable and contract assets from facilitation, post-origination,financing income, guarantee income and other revenue as of December 31, 2022 and 2023, respectively:
| | | | | | | | | | |
| | Accounts | | Accounts | | | | | | |
|
| receivable | | receivable | | Accounts | | Allowance for | | |
| | and contract | | and contract | | receivable | | credit losses | | |
| | assests from | | assests from | | and contract | | for accounts | | |
| | facilitation | | post-origination | | assests from | | receivable and | | |
As of December 31, 2022 |
| services |
| services |
| financing income |
| contract assets |
| Total |
|
| RMB |
| RMB |
| RMB | | RMB | | RMB |
Accounts receivable: | | | | | | | | | | |
Xiaoying Credit Loan |
| 24,326,715 |
| 1,427,297 |
| 54,103,450 | | (15,353,343) | | 64,504,119 |
Other loans | | — | | — | | 824,527 | | (39,132) | | 785,395 |
Contract assests: | | | | | | | | | | |
Xiaoying Credit Loan | | 1,038,520,804 | | 60,244,520 | | 317,399 | | (6,480,105) | | 1,092,602,618 |
Other loans | | 3,887,805 | | 134,389 | | — | | (2,586) | | 4,019,608 |
Total |
| 1,066,735,324 |
| 61,806,206 |
| 55,245,376 | | (21,875,166) | | 1,161,911,740 |
| | | | | | | | | | | | | | |
| | Accounts | | Accounts | | | | | | | | | | |
| | receivable | | receivable | | Accounts | | Accounts | | Accounts | | Allowance for | | |
| | and contract | | and contract | | receivable | | receivable | | receivable | | credit losses | | |
| | assests from | | assests from | | and contract | | and contract | | and contract | | for accounts | | |
| | facilitation | | post-origination | | assests from | | assets from | | assets from | | receivable and | | |
As of December 31, 2023 |
| services |
| services |
| financing income |
| guarantee income |
| other revenue |
| contract assets |
| Total |
| | RMB | | RMB | | RMB | | RMB | | RMB | | RMB | | RMB |
Accounts receivable: | | | | | | | | | | | | | | |
Xiaoying Credit Loan | | 294,129,400 | | 31,190,408 | | 81,665,859 | | 12,330,093 | | — | | (4,010,770) | | 415,304,990 |
Other loans | | — | | — | | 275,067 | | — | | — | | (12,755) | | 262,312 |
Other service | | — | | — | | — | | — | | 32,047,171 | | (1,757,267) | | 30,289,904 |
Contract assests: | | | | | | | | | | | | | | |
Xiaoying Credit Loan | | 1,058,519,704 | | 112,202,337 | | 240 | | 46,494,315 | | — | | (3,485,827) | | 1,213,730,769 |
Total | | 1,352,649,104 | | 143,392,745 | | 81,941,166 | | 58,824,408 | | 32,047,171 | | (9,266,619) | | 1,659,587,975 |
| | | | | | | | | | | | | | |
| | Accounts | | Accounts | | | | | | | | | | |
| | receivable | | receivable | | Accounts | | Accounts | | Accounts | | Allowance for | | |
| | and contract | | and contract | | receivable | | receivable | | receivable | | credit losses | | |
| | assests from | | assests from | | and contract | | and contract | | and contract | | for accounts | | |
| | facilitation | | post-origination | | assests from | | assets from | | assets from | | receivable and | | |
As of December 31, 2023 |
| services |
| services |
| financing income |
| guarantee income |
| other revenue |
| contract assets |
| Total |
| | US$ | | US$ | | US$ | | US$ | | US$ | | US$ | | US$ |
Accounts receivable: | | | | | | | | | | | | | | |
Xiaoying Credit Loan | | 41,427,260 | | 4,393,077 | | 11,502,396 | | 1,736,657 | | — | | (564,905) | | 58,494,485 |
Other loans | | — | | — | | 38,742 | | — | | — | | (1,797) | | 36,945 |
Other service | | — | | — | | — | | — | | 4,513,750 | | (247,506) | | 4,266,244 |
Contract assests: | | | | | | | | | | | | | | |
Xiaoying Credit Loan | | 149,089,381 | | 15,803,369 | | 34 | | 6,548,587 | | — | | (490,968) | | 170,950,403 |
Total | | 190,516,641 | | 20,196,446 | | 11,541,172 | | 8,285,244 | | 4,513,750 | | (1,305,176) | | 233,748,077 |
The following tables present the aging of accounts receivable as of December 31, 2022 and 2023 respectively. For accounts receivable to be collected from borrowers, the Group charges off accounts receivable overdue more than 60 days. For accounts receivable to be collected indirectly through external financing guarantee company or directly from institutional funding partner, the Group charges off accounts receivable when accounts receivable are deemed uncollectible.
| | | | | | | | |
As of December 31, 2022 | | | | | | | | |
Aging |
| Not past-due |
| 1 - 30 days |
| 30 - 60 days |
| Total |
| | RMB | | RMB | | RMB | | RMB |
Accounts receivables | | | | | | | | |
Xiaoying Credit Loan | | 72,674,385 | | 2,932,527 | | 4,250,550 | | 79,857,462 |
Other loans | | 746,331 | | 40,675 | | 37,521 | | 824,527 |
Total | | 73,420,716 | | 2,973,202 | | 4,288,071 | | 80,681,989 |
F-29
| | | | | | | | | | |
As of December 31, 2023 | | | | | | | | | | |
Aging |
| Not past-due |
| 1 - 30 days |
| 30 - 60 days |
| over 60 days |
| Total |
| | RMB | | RMB | | RMB | | RMB | | RMB |
Accounts receivables | | | | | | | | | | |
Xiaoying Credit Loan | | 384,802,879 | | 11,208,150 | | 9,079,796 | | 14,224,935 | | 419,315,760 |
Other loans | | 274,912 | | — | | 155 | | — | | 275,067 |
Other service | | 17,292,087 | | 11,686,750 | | 2,542,468 | | 525,866 | | 32,047,171 |
Total | | 402,369,878 | | 22,894,900 | | 11,622,419 | | 14,750,801 | | 451,637,998 |
| | | | | | | | | | |
As of December 31, 2023 | | | | | | | | | | |
Aging |
| Not past-due |
| 1 - 30 days |
| 30 - 60 days |
| over 60 days |
| Total |
| | US$ | | US$ | | US$ | | US$ | | US$ |
Accounts receivables | | | | | | | | | | |
Xiaoying Credit Loan | | 54,198,352 | | 1,578,635 | | 1,278,863 | | 2,003,540 | | 59,059,390 |
Other loans | | 38,720 | | — | | 22 | | — | | 38,742 |
Other service | | 2,435,540 | | 1,646,044 | | 358,099 | | 74,067 | | 4,513,750 |
Total | | 56,672,612 | | 3,224,679 | | 1,636,984 | | 2,077,607 | | 63,611,882 |
The following tables present the movement of allowance for credit losses for accounts receivables and contract assets as of December 31, 2021, 2022 and 2023:
| | | | | | | | |
| | | | Provision for | | Charge-off for | | |
| | As of | | accounts receivable | | accounts | | As of |
| | January 1, | | and contract assets | | receivable and | | December 31, |
|
| 2021 |
| (net of recovery) (1) |
| contract assets |
| 2021 |
| | RMB | | RMB | | RMB | | RMB |
Accounts receivable: | | | | | | | | |
Xiaoying Credit Loan | | 37,529,193 | | 46,512,298 | | (75,949,087) | | 8,092,404 |
Xiaoying Revolving Loan | | 1,152,487 | | 1,612,419 | | (2,764,906) | | — |
Contract assests: | | | | | | | | |
Xiaoying Credit Loan | | — | | 29,123,093 | | (11,347,540) | | 17,775,553 |
Total | | 38,681,680 | | 77,247,810 | | (90,061,533) | | 25,867,957 |
| | | | | | | | |
|
| |
| (Reversal of) Provision for |
| |
| |
| | | | accounts receivable | | Charge-off for | | |
| | As of | | and contract assets | | accounts | | As of |
| | January 1, | | (net of recovery) | | receivable and | | December 31, |
| | 2022 | | (1) | | contract assets | | 2022 |
| | RMB | | RMB | | RMB | | RMB |
Accounts receivable: |
| |
| |
| |
| |
Xiaoying Credit Loan |
| 8,092,404 | | 21,753,517 | | (14,492,578) | | 15,353,343 |
Other loans | | — | | 145,931 | | (106,799) | | 39,132 |
Contract assests |
| | | | | | | |
Xiaoying Credit Loan |
| 17,775,553 | | (66,409) | | (11,229,039) | | 6,480,105 |
Other loans |
| — | | 2,586 | | — | | 2,586 |
Total |
| 25,867,957 | | 21,835,625 | | (25,828,416) | | 21,875,166 |
F-30
| | | | | | | | |
|
| |
| (Reversal of) Provision for |
| |
| |
| | | | accounts receivable | | Charge-off for | | |
| | As of | | and contract assets | | accounts | | As of |
| | January 1, | | (net of recovery) | | receivable and | | December 31, |
| | 2023 | | (1) | | contract assets | | 2023 |
|
| RMB |
| RMB |
| RMB |
| RMB |
Accounts receivable: |
|
|
|
|
|
|
|
|
Xiaoying Credit Loan |
| 15,353,343 | | 13,063,863 | | (24,406,436) | | 4,010,770 |
Other loans | | 39,132 | | 409,477 | | (435,854) | | 12,755 |
Other service | | — | | 1,757,267 | | — | | 1,757,267 |
Contract assests |
| | | | | | | |
Xiaoying Credit Loan |
| 6,480,105 | | (2,994,278) | | — | | 3,485,827 |
Other loans |
| 2,586 | | (2,586) | | — | | — |
Total |
| 21,875,166 | | 12,233,743 | | (24,842,290) | | 9,266,619 |
| | | | | | | | |
| | | | (Reversal of) Provision for | | | | |
| | | | accounts receivable | | Charge-off for | | |
| | As of | | and contract assets | | accounts | | As of |
|
| January 1, |
| (net of recovery) |
| receivable and |
| December 31, |
| | 2023 | | (1) | | contract assets | | 2023 |
|
| US$ |
| US$ |
| US$ |
| US$ |
Accounts receivable: | | | | | | | | |
Xiaoying Credit Loan | | 2,162,473 | | 1,840,007 | | (3,437,575) | | 564,905 |
Other loans | | 5,512 | | 57,674 | | (61,389) | | 1,797 |
Other service | | — | | 247,506 | | — | | 247,506 |
Contract assests | | | | | | | | |
Xiaoying Credit Loan | | 912,704 | | (421,736) | | — | | 490,968 |
Other loans | | 364 | | (364) | | — | | — |
Total | | 3,081,053 | | 1,723,087 | | (3,498,964) | | 1,305,176 |
| (1) | The recoveries of charge-off of accounts receivables and contract assets amounted to RMB850,597, RMB1,738,580 and RMB244,196 (US$34,394) during the year ended December 31, 2021, 2022 and 2023, respectively. |
As of December 31, 2023, the gross charge-off recorded in the accounts receivables and contract assets amounted to RMB18,685,225 and RMB6,157,065 which originated from loans facilitated in 2022 and 2023, respectively.
(m)Loans receivables from Xiaoying Credit Loans and other loans, net
Loans receivables represent loans facilitated through the Consolidated Trusts and Partnerships and loans provided by Xiaoying Microcredit, which consist of Xiaoying Credit Loans, Xiaoying Revolving Loans and other miscellaneous loans that the Group facilitated and provided during the years. Loans receivables from Xiaoying Credit Loans and other loans are stated at the historical carrying amount net of write-offs and allowance for credit losses. The Group establishes an allowance for credit losses in accordance with ASC 326 based on estimates, historical experience of net vintage-based loss rates, current economic conditions, reasonable and supportable forecasts of future economic conditions and other factors surrounding the credit risk of borrowers. The profile of the borrowers is similar under each product therefore the Group applies a consistent credit risk management framework to the entire portfolio of borrowers under each product. The Group evaluates and adjusts its allowance for credit losses for loans receivables on a quarterly basis or more often as necessary. Uncollectible loans receivables are charged off when a settlement is reached for an amount that is less than the outstanding historical balance or when loans receivables are deemed uncollectible.
As of December 31, 2022 and 2023, loans receivables from Xiaoying Credit Loans and other loans amounted to RMB3,810,393,225 and RMB4,947,833,357 (US$696,887,753) respectively. The general life time of loans receivables from Xiaoying Credit Loans and other loans lasts no more than 12 months.
F-31
The Group excluded the accrued interest receivable balance from the disclosed amortized cost basis, amounting to RMB55,245,376 and RMB81,941,166 (US$11,541,172) as of December 31, 2022 and 2023. The accrued interest receivables were recorded in accounts receivable and contract assets from financing income in the consolidated balance sheet. In 2022 and 2023, the Group charges off loan receivables from Xiaoying Credit Loans and other loans overdue more than 60 days.
The following table presents the loans receivable from Xiaoying Credit Loans and other loans originated or facilitated through the Consolidated Trusts and Partnerships and retained by the Company as of December 31, 2022 and 2023, respectively:
| | | | | | |
| | Loans receivables | | | | |
| | from Xiaoying | | | | |
| | Credit Loans and | | | | |
| | other | | Allowance for | | |
As of December 31, 2022 |
| loans |
| credit losses |
| Total |
| | RMB | | RMB | | RMB |
Xiaoying Credit Loan | | 3,856,622,443 | | (103,630,827) | | 3,752,991,616 |
Other loans | | 60,249,936 | | (2,848,327) | | 57,401,609 |
Total |
| 3,916,872,379 | | (106,479,154) | | 3,810,393,225 |
| | | | | | |
|
| Loans receivables | | | | |
| | from Xiaoying | | | | |
| | Credit Loans and | | | | |
| | other | | Allowance for | | |
As of December 31, 2023 |
| loans |
| credit losses |
| Total |
|
| RMB | | RMB | | RMB |
Xiaoying Credit Loan |
| 5,136,542,858 | | (188,718,875) | | 4,947,823,983 |
Other loans | | 9,948 | | (574) | | 9,374 |
Total |
| 5,136,552,806 | | (188,719,449) | | 4,947,833,357 |
| | | | | | |
|
| Loans receivables | | | | |
| | from Xiaoying | | | | |
| | Credit Loans and | | | | |
| | other | | Allowance for | | |
As of December 31, 2023 |
| loans |
| credit losses |
| Total |
|
| US$ | | US$ | | US$ |
Xiaoying Credit Loan |
| 723,466,931 | | (26,580,498) | | 696,886,433 |
Other loans | | 1,401 | | (81) | | 1,320 |
Total |
| 723,468,332 | | (26,580,579) | | 696,887,753 |
F-32
The following tables present the movement of provision for loans receivable from Xiaoying Credit Loans and other loans as of December 31, 2021, 2022 and 2023 , respectively:
| | | | | | | | |
|
|
|
| (Reversal of) |
|
|
|
|
| | | | provision for loans | | | | |
| | | | receivable | | | | |
| | | | from Xiaoying Credit | | | | |
| | As of | | Loans and other | | | | |
| | January 1, | | loans (net of | | | | As of December |
| | 2021 | | recovery) (1) | | Charge-off | | 31, 2021 |
| | RMB | | RMB | | RMB | | RMB |
Xiaoying Credit Loans |
| 70,615,780 |
| 80,823,776 |
| (96,714,499) |
| 54,725,057 |
Xiaoying Revolving Loans |
| 31,940,004 |
| (4,428,608) |
| (26,900,712) |
| 610,684 |
Total |
| 102,555,784 |
| 76,395,168 |
| (123,615,211) |
| 55,335,741 |
| | | | | | | | |
| | | | (Reversal of) | | | | |
| | | | provision for | | | | |
| | | | loans receivable | | | | |
| | | | from Xiaoying Credit | | | | |
|
| | | Loans and |
| |
| |
|
| As of December 31, |
| other loans (net of |
| |
| As of December 31, |
| | 2021 | | recovery) (1) | | Charge-off | | 2022 |
| | RMB | | RMB | | RMB | | RMB |
Xiaoying Credit Loans | | 54,725,057 | | 160,131,434 | | (111,225,664) | | 103,630,827 |
Xiaoying Revolving Loans | | 610,684 | | — | | (610,684) | | — |
Other loans | | — | | 4,510,445 | | (1,662,118) | | 2,848,327 |
Total |
| 55,335,741 | | 164,641,879 | | (113,498,466) | | 106,479,154 |
| | | | | | | | |
| | | | (Reversal of) | | | | |
| | | | provision for | | | | |
|
| | | loans receivable |
| | | |
| | | | from Xiaoying Credit | | | | |
| | | | Loans and | | | | |
| | As of December 31, | | other loans (net of | | | | As of December 31, |
|
| 2022 |
| recovery) (1) |
| Charge-off |
| 2023 |
| | RMB | | RMB | | RMB | | RMB |
Xiaoying Credit Loans | | 103,630,827 | | 234,237,584 | | (149,149,536) | | 188,718,875 |
Xiaoying Revolving Loans | | — | | (2,737,290) | | 2,737,290 | | — |
Other loans | | 2,848,327 | | 1,849,982 | | (4,697,735) | | 574 |
Total |
| 106,479,154 | | 233,350,276 |
| (151,109,981) |
| 188,719,449 |
| | | | | | | | |
| | | | (Reversal of) | | | | |
|
| | | provision for loans |
| | | |
| | | | receivable from | | | | |
| | | | Xiaoying Credit | | | | |
| | | | Loans and | | | | |
| | As of December 31, | | other loans (net of | | | | As of December 31, |
|
| 2022 |
| recovery) (1) |
| Chargeoff |
| 2023 |
| | US$ | | US$ | | US$ | | US$ |
Xiaoying Credit Loans | | 14,596,097 | | 32,991,673 | | (21,007,272) | | 26,580,498 |
Xiaoying Housing Loans | | — | | (385,539) | | 385,539 | | — |
Other loans | | 401,178 | | 260,565 | | (661,662) | | 81 |
Total |
| 14,997,275 | | 32,866,699 |
| (21,283,395) | | 26,580,579 |
As of December 31, 2023, the gross charge-off recorded in the loans receivables from Xiaoying Credit Loans and other loans amounted to RMB69,531,421 and RMB81,578,560 which originated from loans provided by Xiaoying Microcredit in 2022 and 2023, respectively.
F-33
The following table presents the aging of loans receivable from Xiaoying Credit Loans and other loans as of December 31, 2022 and 2023, respectively:
| | | | | | | | |
As of December | | | | | | | | |
31, 2022 | | | | | | | | |
Aging |
| Not past-due |
| 1 - 30 days |
| 30 - 60 days |
| Total |
| | RMB | | RMB | | RMB | | RMB |
Xiaoying Credit Loans | | 3,822,596,905 | | 22,812,090 | | 11,213,448 | | 3,856,622,443 |
Other loans | | 57,586,395 | | 1,705,924 | | 957,617 | | 60,249,936 |
Total | | 3,880,183,300 | | 24,518,014 | | 12,171,065 | | 3,916,872,379 |
| | | | | | | | |
As of December | | | | | | | | |
31, 2023 | | | | | | | | |
Aging |
| Not past-due |
| 1 - 30 days |
| 30 - 60 days |
| Total |
| | RMB | | RMB | | RMB | | RMB |
Xiaoying Credit Loans | | 5,065,805,660 | | 46,638,396 | | 24,098,802 | | 5,136,542,858 |
Other loans | | 2,000 | | — | | 7,948 | | 9,948 |
Total | | 5,065,807,660 | | 46,638,396 | | 24,106,750 | | 5,136,552,806 |
| | | | | | | | |
As of December |
| | | | | | | |
31, 2023 | | | | | | | | |
Aging | | Not past-due |
| 1 - 30 days |
| 30 - 60 days |
| Total |
| | US$ | | US$ | | US$ | | US$ |
Xiaoying Credit Loans | | 713,503,805 | | 6,568,881 | | 3,394,245 | | 723,466,931 |
Other loans | | 282 | | — | | 1,119 | | 1,401 |
Total | | 713,504,087 | | 6,568,881 | | 3,395,364 | | 723,468,332 |
The following table provides information on past due days, which is the primary credit quality indicator for loans receivables from Xiaoying Credit Loans and other loans. The amortized cost of loans was presented by year of origination as of December 31, 2022 and 2023.
| | | | | | | | |
As of December |
| | | | | | | |
31, 2022 | | | | | | | | |
Loans originated or facilitated in | | Not past-due | | 1 - 30 days | | 30 - 60 days | | Total |
|
| RMB |
| RMB |
| RMB |
| RMB |
2020 and before |
| — |
| — |
| — |
| — |
2021 |
| 13,720 |
| 915,986 |
| 1,365,748 |
| 2,295,454 |
2022 |
| 3,880,169,580 |
| 23,602,028 |
| 10,805,317 |
| 3,914,576,925 |
Total |
| 3,880,183,300 |
| 24,518,014 |
| 12,171,065 |
| 3,916,872,379 |
| | | | | | | | |
| | | | | | | | |
As of December |
| | | | | | | |
31, 2023 | | | | | | | | |
Loans originated or facilitated in | | Not past-due | | 1 - 30 days | | 30 - 60 days | | Total |
|
| RMB |
| RMB |
| RMB |
| RMB |
2021 and before |
| — |
| — |
| — |
| — |
2022 |
| 25,330 |
| 510,844 |
| 993,499 |
| 1,529,673 |
2023 |
| 5,065,782,330 |
| 46,127,552 |
| 23,113,251 |
| 5,135,023,133 |
Total |
| 5,065,807,660 |
| 46,638,396 |
| 24,106,750 |
| 5,136,552,806 |
(n)Loans and payable to investors at fair value of Consolidated Trusts
For Consolidated Trusts founded before December 31, 2021, the Group elected to apply the fair value option for the loan assets and liabilities of the Consolidated Trusts on an individual basis at initial recognition, which is irrevocable throughout the existing period of each Consolidated Trust. For the Consolidated Trusts founded after January 1, 2022, the Group elected to apply amortized cost method to the loan assets and liabilities of newly formed Consolisated Trusts.
F-34
For loan assets and liabilities measured at fair value, the Group uses a discounted cash flow valuation methodology by discounting the estimated future net cash flows using an appropriate discount rate. The future net cash flows are estimated based on contractual cash flows, taking into consideration of estimated loss rate and prepayment rate of the loans, and the pre-determined rate of the Group’s guarantee exposure for certain products. They are recorded as “Loans at fair value” and “Payable to investors at fair value” in the consolidated balance sheet. Changes in fair value of loans and payable to investors are reported net as recorded in “Fair value adjustments related to Consolidated Trusts” in the consolidated statement of comprehensive income. See Note 3 for further disclosure on financial instruments of the Consolidated Trusts for which the fair value option has been elected.
(o)Loan receivable from Xiaoying Housing Loans, net
Xiaoying Housing Loan is a home equity loan product secured by properties owned by borrowers and had been ceased the facilitation since 2019.
The Group directly or indirectly guarantees on borrowers’ defaults to the investors of Xiaoying Housing Loan products and obtains a collateral right from the borrowers for such guarantees. The collaterals include apartments, houses and properties, which can fully cover the underlying loan principal and interest. Upon default of the loan, the Group compensates the investor or institutional funding partners for defaulted loan principal and interest and obtains the creditor’s right of the underlying loan. The payout amount in relation to the original guarantee provision provided at loan inception was recorded as a deduction of guarantee liability, reflected in net payouts in the guarantee liabilities rollforward. The remaining payout amount in relation to the acquisition of the creditor’s right of the underlying loan is recorded as loan receivable upon payment of compensation in “Loan receivable from Xiaoying Housing Loans” in the consolidated balance sheets as the collection cycle typically will be more than one year. No loan receivables are recorded at loan inception.
Loan receivable from Xiaoying Housing Loans is recorded based on the present value of the expected amount to be collected from the exercise of the collateral right. Given the deterioration of the credit related to those loans upon acquisition, the Group determined that those loans are in non-accrual status and should only recognize related service and penalty fees upon cash received in other revenues.
The outstanding balance of loan receivable from Xiaoying Housing Loans were RMB10,061,258 and RMB8,656,846 (US$1,219,291) as of December 31, 2022 and 2023, respectively. The contractually required payments that are receivable for loans acquired during 2022 and 2023 were nil and nil, respectively. The outstanding undiscounted balance including the principal, interest, fees, penalties under Xiaoying Housing Loans receivable were RMB154,623,985 and RMB170,563,345 (US$24,023,345), as of December 31, 2022 and 2023, respectively. The guarantee related to the default of the outstanding balance of Xiaoying Housing Loan were all settled in 2020.
Allowance for credit losses for loan receivable is established through periodic charges to the provision for loan receivable when the Group believes that the future collection of defaulted loan principal and interest is unlikely. Allowance for credit losses for loan receivables from Xiaoying Housing loans is also recognized when the fair value is below the original recorded present value of the expected amount to be collected. In order to accelerate the collection process, the Group transferred the creditor rights of certain defaulted loans as well as the underlying collateral right to third party companies at a discount in 2020 and 2021. The discounted amount was recorded as an allowance for credit losses for loan receivables which represent the amount that the Group expects not able to collect from the proceedings. In addition, the Group also recorded an allowance for credit losses for the remaining outstanding loans not transferred benchmarked to the discounted amount. The Group also institutes proceedings to collect the payout amount from collaterals. Uncollectible loan receivable from Xiaoying Housing Loans is charged off when a settlement is reached for an amount that is less than the outstanding historical balance or when loan receivables are deemed uncollectible.
The following tables presents the movement in provision for loans receivable from Xiaoying Housing Loans for the years ended December 31, 2021, 2022 and 2023.
| | | | | | |
|
| Reversal of provision for Loans Receivable |
| Recoveries of |
| |
As of December 31, 2020 |
| from Xiaoying Housing Loans |
| charge-off |
| As of December 31, 2021 |
RMB | | RMB | | RMB | | RMB |
— |
| (377,559) | | 377,559 |
| — |
F-35
| | | | | | |
|
| Reversal of provision for Loans Receivable |
| Recoveries of |
| |
As of December 31, 2021 |
| from Xiaoying Housing Loans |
| charge-off |
| As of December 31, 2022 |
RMB | | RMB | | RMB | | RMB |
— |
| (6,066,176) | | 6,066,176 |
| — |
| | | | | | |
|
| Reversal of provision for Loans Receivable |
| Recoveries of |
|
|
As of December 31, 2022 | | from Xiaoying Housing Loans | | charge-off | | As of December 31, 2023 |
RMB |
| RMB |
| RMB |
| RMB |
— |
| (4,213,234) | | 4,213,234 |
| — |
| | | | | | |
|
| Reversal of provision for Loans Receivable |
| Recoveries of |
| |
As of December 31, 2022 |
| from Xiaoying Housing Loans |
| charge-off |
| As of December 31, 2023 |
US$ | | US$ | | US$ | | US$ |
— |
| (593,422) |
| 593,422 |
| — |
The recoveries of loans receivable from Xiaoying Housing Loans amounted to RMB35,784,680, RMB8,088,235 and RMB5,617,646 (US$791,229) during the year ended December 31, 2021, 2022 and 2023, respectively.
The following tables presents the aging of Loan receivables from Xiaoying Housing Loans as of December 31, 2022 and 2023, respectively:
| | | | | | | | |
As of December 31, 2022 |
| Over due 1 – 2 |
| Over due 2 – 3 |
| Over due over 3 |
| |
Aging | | years | | years | | years | | Total |
| | RMB | | RMB | | RMB | | RMB |
Xiaoying Housing Loans |
| — | | — | | 10,061,258 | | 10,061,258 |
| | | | | | | | |
As of December 31, 2023 |
| Over due 1 – 2 |
| Over due 2 – 3 |
| Over due over 3 |
| |
Aging | | years | | years | | years | | Total |
| | RMB | | RMB | | RMB | | RMB |
Xiaoying Housing Loans |
| — | | — | | 8,656,846 | | 8,656,846 |
| | | | | | | | |
As of December 31, 2023 |
| Over due |
| Over due |
| Over due |
| |
Aging | | 1 – 2 years | | 2 – 3 years | | over 3 years | | Total |
| | US$ | | US$ | | US$ | | US$ |
Xiaoying Housing Loans |
| — |
| — | | 1,219,291 | | 1,219,291 |
(p)Financial investments
The Group invested in several Venture Capital funds (“VC funds”) in the year 2022 and 2023. These investments are in the legal form of limited partnership or zero coupon convertible note.
For partnership investments, unless the fair value option under ASC 825 is elected, the Group uses equity method to account for these investments under ASC 323, which means these investments are initially recorded at cost and subsequently adjusted for the proportionated share of income or loss, impairment as well as contributions made or distributions received. However, for the case that virtually no influence was exerted by the Group in the partnership agreement, fair value measurement is applied under ASC 321. For VC funds investment measured under ASC 321, fair value measurement is applied except for the case that readily determinable fair value is not available thus the Group measures them alternatively at cost minus impairment, plus or minus observable price changes from orderly transactions of identical or similar investments of the same issuer.
For the investment in the legal form of zero coupon convertible note, it is in substance a prepaid forward contract that entitles the Group to obtain shares of the VC fund in the future, and because no readily determinable fair value is available, the Group measures the investment at cost minus impairment, plus or minus observable price changes from orderly transactions of identical or similar investments of the same issuer under ASC 321.
The Group reviews VC funds investment for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is measured based on the excess of the carrying amount of an investment over its estimated fair value.
F-36
The Group invested in several U.S. Treasury bill with original maturities over three months and wealth management products. Given its intention and abilities, the Group account these investments under available for sale model.
(q)Deposits to institutional cooperators, net
Starting from November 2019, the Group enter into a series of deposit arrangements with financing institutional cooperators, such as insurance company and financing guarantee company. The Group is required to pay deposits to those financial institutional cooperators monthly or in accordance with an agreed payment schedule. The amount of deposit is separately agreed with each institutional cooperator, usually calculated by multiplying the outstanding loan balance on the reconciliation date by an agreed percent rate (“the standard amount “). The agreed percent rate may be adjusted from time to time. If the balance of the deposits exceeds the standard amount or supplementary payment of deposit is needed, the financial institutional cooperators shall refund the excess part to the Group or the Group shall make supplementary payment of deposit in accordance with an agreed payment schedule.
Deposits to institutional cooperators is stated at the historical carrying amount net of write-offs and allowance for credit losses. The Group establishes an allowance for credit losses based on estimates, the current and expected probability of default, insurance premium/guarantee fee, the historical pay-out amounts, the outstanding loan balances, the forecasted loan facilitation amounts and the credit risk of institutional cooperators. The Group evaluates and adjusts its allowance for credit losses for deposits to institutional cooperators on a quarterly basis or more often as necessary. Deposits to institutional cooperators are charged off when deposits are deemed uncollectible. Deposits to institutional cooperators are recorded as current assets because the term of the underlying loan assets was 12 months or less. As of December 31, 2022 and 2023, all deposits are refundable and none of them passed the original due date.
(r)Property and equipment, net
Furniture and equipment are recorded at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated on a straight-line basis over the following estimated useful lives:
| | |
Computer and transmission equipment |
| 3 years |
Furniture and office equipment | | 5 years |
Motor vehicles | | 4 years |
Leasehold improvements | | Over the shorter of the lease term or expected useful lives |
Gains and losses from the disposal are included in “Other income (loss), net”.
(s)Intangible assets
Intangible assets with finite lives represent domain name and purchased computer software. These intangible assets are amortized on a straight-line basis over their estimated useful lives of the respective asset, which varies from 1 to 10 years.
Intangible assets with an indefinite useful life represent the insurance broker license purchased during 2018 and insurance sale on line license authorized in 2019, See Note 7. Intangible assets with an indefinite life is not amortized and is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired.
(t)Impairment of long-lived assets
Long-lived assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When these events occur, the Group evaluates the impairment for the long-lived assets by comparing the carrying amounts of the assets to an estimate of future undiscounted cashs flow attributable to theses assets. If the sum of the future undiscounted cash flows is less than the carrying amouts of the assets, the Group recognizes an impairment loss based on the excess of the carrying amounts of the assets over the fair value of the assets. Meanwhile, annual impairment testing is required for goodwill and intangible assets that have an indefinite useful life.
F-37
(u)Long-term investments
The Group accounts for long-term investments using equity method of accounting as the Group has the ability to exercise significant influence over investments. As part of this evaluation, the Group considers the participating and protective rights in the investments as well as its legal form.
The Group applies the equity method of accounting for the long-term investments when the Group has the ability to significantly influence the operations or financial activities of the investee. The Group records the investments at cost and subsequently adjusts the carrying amount each period for share of the earnings or losses of the investee and other adjustments required by the equity method of accounting. Dividends received from the equity method investments are recorded as reductions in the cost of such investments. The group elects cumulative earnings approach for classifying the distributions received from equity method investments.
Long-term investments are evaluated for impairment when facts or circumstances indicate that the fair value of the long-term investments is less than its carrying value. An impairment is recognized when a decline in fair value is determined to be other-than-temporary. The Group reviews several factors to determine whether a loss is other-than-temporary. These factors include, but are not limited to, the: (i) nature of the investment; (ii) cause and duration of the impairment; (iii) extent to which fair value is less than cost; (iv) financial condition and near term prospects of the investments; and (v) ability to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value. As of December 31, 2022 and 2023, long-term investments of the Group consist of three equity investments of Chinese Mainland private companies, respectively.
(v)Deposit payable to channel cooperators
The Group co-operates with selected Fintech and other financial companies by connecting the borrowers referred by those companies to investors on the Group’s platform. As part of the arrangements, the selected companies also provide credit enhancements on the loans facilitated to the borrowers referred by them and are required to pay a certain amount of cash as deposit to the Group, from which the Group is entitled to deduct if they fail to compensate the defaulted loans on a timely basis. Any remaining balance of the deposit is released upon expiry of the co-operation agreements or newly signed settlement agreements. As of December 31, 2022 and 2023, the outstanding balance of the deposit that the Group received from Fintech and other financial companies were RMB19,700,235 and RMB19,700,235 (US$2,774,720) respectively.
(w)Employee defined contribution plan
Full time employees of the Group in the Chinese Mainland participate in a government mandated multi-employer defined contribution plan pursuant to which certain pension benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees. Chinese labor regulations require that the Group make contributions to the government for these benefits based on a certain percentage of the employee’s salaries. The Group has no legal obligation for the benefits beyond the contributions. The total amount that was expensed as incurred were RMB35,601,429, RMB41,757,571and RMB47,040,770 (US$6,625,554) for the years ended December 31, 2021, 2022 and 2023, respectively.
(x)Advertising cost
Advertising costs are expensed as incurred in accordance with ASC 720-35 Other Expense—Advertising costs. Advertising costs were RMB7,395,353, RMB8,491,724 and RMB8,105,126 (US$1,141,584) for the years ended December 31, 2021, 2022 and 2023, respectively. Advertising costs are included in sales and marketing expense in the consolidated statements of comprehensive income (loss).
(y)Origination and servicing expense
Origination and servicing expense consists primarily of variable expenses and vendor costs, including labor costs, costs related to credit assessment, borrower acquisitions, payment processing services, fees paid to third party collection agencies, as well as interest expense paid to investors and institutional funding partners of the Consolidated Trusts and Partnerships.
(z)Income taxes
Current taxes are recognized for in accordance with the laws of the relevant taxing authorities.
F-38
The Company’s income tax expense includes Chinese Mainland and Hong Kong income taxes plus the recognition of Chinese Mainland taxes on undistributed earnings of Beijing WFOE not considered to be indefinitely reinvested.
Deferred taxes are provided using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax return. Under this method, deferred tax assets and liabilities are recognized for the differences between the financial statement carrying amount and the tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are then evaluated to determine the extent to which they are more likely than not to be realized. In making such a determination, management considers all positive and negative evidence, including future reversals of existing taxable temporary differences and projected future taxable income exclusive of reversing temporary differences and carryforwards. Deferred tax assets are then reduced by a valuation allowance to the amount, in the opinion of management, that is more likely than not to be realized.
The Group accounts for uncertainty in income taxes recognized in the consolidated financial statements by applying a two-step process to determine the amount of the benefit to be recognized. First, each the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination by the taxing authorities. If a tax position is deemed more-likely-than-not to be sustained (defined as a likelihood of more than fifty percent of being sustained upon an examination, based on the technical merits of the tax position), the tax position is then assessed to determine the amount of benefits to recognize in the consolidated financial statements. The amount of the benefits that may be recognized is the largest amount that has a greater than 50 percent likelihood of being realized upon settlement. Interest and penalties on income taxes are classified as a component of income taxes.
(aa)Value added taxes (“VAT”)
The Group is subject to VAT at the rate of 6% and 13% given that they are classified as general tax payers and at the rate of 3% as certain Consolidated Trusts and Partnerships of the Group are classified as small-scale tax payers. VAT is reported as a deduction to revenue when incurred and amounted to RMB228,029,948, RMB234,931,501, and RMB301,613,913(US$42,481,431) for the years ended December 31, 2021, 2022 and 2023, respectively. Entities that are VAT general taxpayers are allowed to offset qualified input VAT paid to suppliers against their output VAT liabilities. Net VAT balance between input VAT and output VAT is recorded in the line item of accrued expense and other liabilities on the consolidated balance sheets.
(ab)Segment information
The Group uses management approach to determine operation segment. The management approach considers the internal organization and reporting used by the Group’s chief operating decision maker (“CODM”) for making decisions, allocation of resource and assessing performance.
The Group’s CODM has been identified as the Chief Executive Officer who reviews the consolidated results of operations when making decisions about allocating resources and assessing performance of the Group. The Group operates and manages its business as a single segment.
All of the Group’s revenue for the years ended December 31, 2021, 2022 and 2023 were generated from the Chinese Mainland. As the Group generates all of its revenues in the PRC, no geographical segments are presented.
(ac)Treasury shares
The Group accounts for treasury shares using the cost method. Under this method, the cost incurred to purchase the shares is recorded in the treasury shares account in the consolidated balance sheets. In the event that treasury shares are transferrd to Employee Stock Ownership Plans (“ESOP”), the Company recognized the amount in addition paid-in capital. The treasury shares account includes 41,199,374 and 35,564,336 ordinary shares as of December 31, 2022 and 2023, respectively, which will be canceled or held as treasury shares.
F-39
(ad)Leases
The Group adopted ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”) from January 1, 2019 by using the modified retrospective method and did not restate the comparable periods. The Group has elected the package of practical expedients, which allows the Group not to reassess (1) whether any expired or existing contracts as of the adoption date are or contain a lease, (2) lease classification for any expired or existing leases as of the adoption date and (3) initial direct costs for any expired or existing leases as of the adoption date. The Group also elected the practical expedient not to separate lease and non-lease components of contracts. Lastly, the Group elected the short-term lease exemption for all contracts with lease terms of 12 months or less.
The Group determines if an arrangement is a lease or contains a lease at inception. Right-of-use (“ROU”) assets and liabilities are recognized at lease commencement date based on the present value of remaining lease payments over the lease terms. As most of the Group’s leases do not provide an implicit rate, the Group estimates its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The incremental borrowing rate is estimated to approximate the interest rate on a collateralized basis with similar terms and payments, and in economic environments where the leased asset is located. The Group’s leases often include options to extend lease terms and such extended terms are included in lease terms when the Group is reasonably certain to exercise those options. Lease terms also include periods covered by options to terminate the leases when the Group is reasonably certain not to exercise those options. Lease expense is recorded on a straight-line basis over the lease term. For operating leases, ROU assets were recorded as “Other non-current assets”, and the current and non-current portions of the lease liabilities were recorded as “Accrued expenses and other current liabilities” and “Other non-current liabilities” in the consolidated balance sheets. The Group does not have any finance leases for the year ended December 31, 2022 and 2023.
As of December 31, 2022 and 2023, the Group recognized ROU assets of RMB62,688,248 and RMB50,628,099 (US$7,130,819), and total lease liabilities of RMB62,497,742 and RMB50,423,551 (US$7,102,009), including current portion of RMB11,304,693 and RMB12,852,494 (US$1,810,236).
The Group’s operating leases mainly related to office facilitates. As of December 31, 2023, the weighted average remaining lease term was 3.86 years and the weighted average discount rate was 6.2%for the Group’s operating leases.
Operating lease cost for the year ended 31 December, 2023 was RMB16,289,500 (US$2,294,328), which excluded cost of short-term contracts. Short-term lease cost for the year ended 31 December, 2023 was insignificant. For the year ended 31 December, 2022 and 2023, no lease cost for operating leases was capitalized. Supplemental cash flow information related to operating leases was as follows:
| | | | |
| | As of December 31, 2023 | ||
|
| RMB |
| US$ |
Cash payments for operating leases |
| 16,693,739 | | 2,351,264 |
ROU assets obtained in exchange for operating lease liabilities |
| 1,117,223 | | 157,358 |
Future lease payments under operating leases as of December 31, 2023 were as follows:
| | | | |
| | Operating leases | ||
|
| RMB |
| US$ |
Year ending December 31, |
| | | |
2024 |
| 15,666,317 | | 2,206,555 |
2025 |
| 16,009,686 | | 2,254,917 |
2026 | | 9,572,584 | | 1,348,270 |
2027 | | 9,955,571 | | 1,402,213 |
2028 and thereafter | | 5,940,714 | | 836,732 |
Total future lease payments | | 57,144,872 | | 8,048,687 |
Less: Imputed interest | | 6,721,321 | | 946,678 |
Total lease liability balance | | 50,423,551 | | 7,102,009 |
As of December 31, 2023, additional operating leases that have not yet commenced were immaterial.
F-40
(ae)Net income (loss) per share
Basic income (loss) per share is computed by dividing net income (loss) attributable to the holders of ordinary shares by the weighted average number of ordinary shares outstanding during the year. Diluted income (loss) per share is calculated by dividing net income (loss) attributable to the holders of ordinary shares as adjusted for the effect of dilutive ordinary share equivalents, if any, by the weighted average number of ordinary shares and dilutive ordinary share equivalents outstanding during the period. Ordinary share equivalents of stock options are calculated using the treasury stock method. However, ordinary share equivalents are not included in the denominator of the diluted earnings per share calculation when inclusion of such shares would be anti-dilutive, such as in a period in which a net loss is recorded.
(af)Share-based compensation
Share-based payment transactions with employees and directors, such as stock options and restricted stocks, are measured based on the grant date fair value of the awards in accordance with ASC 718, Compensation-Stock Compensation, with the resulting expense generally recognized on a straight-line basis in the consolidated statements of income over the period during which the employee is required to perform service in exchange for the award.
(ag)Certain risks and concentrations
Financial instruments that potentially expose the Group to concentrations of credit risk consist principally of cash, restricted cash, financial investments, accounts receivable and contract assets, deposits to institutional cooperators, loans receivables and loans at fair value.
The Group’s investment policy requires cash and restricted cash to be placed with high-quality financial institutions and to limit the amount of credit risk from any one issuer. The Group regularly evaluates the credit standing of the counterparties or financial institutions.
Financial investments that potentially subject the Group to market risk mainly consist of investments in VC funds. The Group limits its exposure to market risks associated with financial investments by regularly conducting post-investment management of the funds.
Accounts receivable and contract assets are typically unsecured and are derived from revenue earned from customers in the PRC. The risk with respect to accounts receivable and contract assets is mitigated through the Group’s consistent credit risk management framework to the entire portfolio of borrowers under each product. The Group also constantly monitors the financial condition and evaluates the credit quality of certain institutional funding partners and external financing guarantee companies from which the Group’s service fees are collected.
Deposits to institutional cooperators are placed with financial institutional cooperators. The Group regularly monitors the financial condition and evaluates the credit quality of each institutional cooperator.
Credit of loans receivables and loans at fair value is controlled by the application of credit approval, limit and monitoring procedures.
No investor or institutional funding partner represented greater than 10% or more of the total net revenues for the years ended December 31, 2021, 2022 and 2023.
During the year ended December 31, 2022 and 2023, there were two and two institutional cooperators individually provided credit insurance or guarantee services for greater than 10% or more of the total loans the Group facilitated and provided.
| | | | | |
|
| Year ended |
| Year ended | |
| | December 31, | | December 31, | |
| | 2022 | | 2023 | |
Institutional cooperator A |
| 29.6 | % | 21.5 | % |
Institutional cooperator B | | * | | 10.3 | % |
Institutional cooperator C | | 12.3 | % | * | |
F-41
There were three and one contract assets due from institutional funding partners/institutional cooperators that individually accounted for greater than 10% of the Group’s carrying amount of accounts receivable and contract assets as of December 31, 2022 and 2023, respectively.
| | | | | |
|
| As of December 31, |
| As of December 31, | |
| | 2022 | | 2023 | |
Institutional cooperator A | | 26.3 | % | 14.0 | % |
Institutional cooperator D |
| 15.6 | % | * | |
Institutional cooperator C | | 13.7 | % | * | |
As of December 31, 2022 and 2023, four and two institutional cooperators individually accounted for more than 10% of the Group’s deposits to institutional cooperators, respectively.
| | | | | |
|
| As of December 31, |
| As of December 31, | |
| | 2022 | | 2023 | |
Institutional cooperator E | | * | | 11.9 | % |
Institutional cooperator B | | 10.0 | % | 10.8 | % |
Institutional cooperator C |
| 20.1 | % | * | |
Institutional cooperator D |
| 19.2 | % | * | |
Institutional cooperator F | | 10.7 | % | Nil | |
* Less than 10%.
The Company manages current payment risk of financial guarantee derivative through a self-developed risk management model. The rating scale of risk management model takes into account factors such as identity characteristics, credit history, payment overdue history, payment capacity, behavioral characteristics and online social network activity.
(ah)Allowance for credit losses
In June 2016, the Financial Accounting Standards Board (FASB) issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326). The ASU introduced a new credit loss methodology, the current expected credit losses (“CECL”) methodology, which requires earlier recognition of credit losses while also providing additional disclosure about credit risk. The Group adopted the ASU as of January 1, 2020, which resulted in an increase in the Group’s Allowance for credit losses (“ACL”) and a decrease to opening Retained earnings, net of deferred income taxes, at January 1, 2020. The financial guarantees provided for the Group’s off - balance sheet loans accounted for under ASC 460 are in the scope of ASC 326 and subject to the CECL methodology.
The CECL methodology utilizes a lifetime “expected credit loss” measurement objective for the recognition of credit losses for loans, receivables, contract assets and other financial assets measured at amortized cost at the time the financial asset is originated or acquired. The ACL is measured based on the financial assets that share similar risk characteristics and includes both quantitative and qualitative components, and adjusted each period for changes in expected lifetime credit losses. The Group establishes the CECL methodology, which is based on past events, current conditions, and reasonable and supportable forecasts over the life of the financial assets.
For the Group’s accounts receivable and contract assets, loans receivable and certain off-balance sheet credit exposures, such as financial guarantees not accounted for as derivatives, generated from microcredit business and financing guarantee business, the ACL for these financial assets is driven by the default risk of underlying loans. The ACL is calculated using vintage-based loss rate and macroeconomic forecast scenario models, and is the product of multiplying the estimates of vintage-based loss rates and the individual level exposure at default on an undiscounted basis, adjusted for a weighted macroeconomic forecast. The model to estimate the loss rates considers the historical loss experience period for the vintage-based loss rates.
F-42
For the Group’s accounts receivable and contract assets generated from the loans facilitated that the Group collected indirectly through external financing guarantee company or directly from institutional funding partner, loans receivables for loans facilitated through the Consolidated Trusts and Partnerships that protected by financial institutional cooperators with credit insurance/financial guarantee services provided, deposits to financial institutional cooperators and certain financial assets, the ACL for these financial assets is mainly driven by the credit risk of financial institutional cooperators or institutional funding partners. The ACL is calculated using probability of default, loss given default and macroeconomic forecast scenario models, and is the product of multiplying the probability of default determined by the external credit ratings of financial institutional cooperators or institutional funding partners, loss given default and individual loan level exposure at default on an undiscounted basis, and adjusted for a weighted macroeconomic forecast.
For the Group’s other financial assets, the ACL is mainly determined to be the amount of probable incurred credit losses based on historical experience and other factors surrounding the credit risk of the counterparty. For individual counterparty where there is an observable indicator of loss, an individually evaluated allowance for credit losses is provided.
Under the CECL methodology, macroeconomic forecast scenario model is also applied to the ACL for a weighted macroeconomic forecast adjustment. The Group develops the macroeconomic forecast scenario model by establishing the weighted multiple macroeconomic forecast scenarios over the life of the loans and a pool of selected economic variables, including gross domestic product (GDP), unemployment rate and other macro-economic variables that were determined to be the most relevant to the credit losses. The CECL methodology’s impact on expected credit losses, among other things, reflects the Group’s view of the current state of the economy, forecasted macroeconomic conditions and the Group’s portfolios.
The qualitative component of the CECL methodology represents the Group’s judgment of additional considerations to account for internal and external risk factors that are not adequately measured in the quantitative component, including consideration of idiosyncratic risk factors or other relevant factors.
The Group’s ACL consists of provision for accounts receivable and contract assets, provision for loans receivable from Xiaoying Credit Loans and other loans, provision for contingent guarantee liabilities, provision for credit losses on deposits to institutional cooperators and provision of credit losses for other financial assets. The net increase to the ACL amounted to RMB139.5 million for the year ended December 31, 2023 reflected the combined effect mainly of (i) an increase in guarantee liability arising from financing guarantee business operated by a subsidiary which holds the financing guarantee license and commenced the financing guarantee business in 2023, (ii) an increase in loans receivable held by the Group as a result of the increase in the total loan amount facilitated and originated this year, (iii) an increase of in weighted average vintage-based loss rates from 5.10% in 2022 to 8.97% in 2023 for loans receivable generated from microcredit business due to the challenge from slow recovery of China’s macroeconomy and the intensification of competition in the industry, and (iv) partially net-off by a decrease in accounts receivable and contract assets generated from business of Shenzhen Xintang as the Group settled the remaining business in the first quarter of 2023.
(ai)Recent accounting pronouncements
The FASB issued Accounting Standards Update No. 2023-07 Segment Reporting—Improvements to Reportable Segment Disclosures (Topic 280) in November, 2023. which will be effective for fiscal years beginning after December 15, 2024. The standard improves reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses.
F-43
The FASB issued Accounting Standards Update No. 2023-06 Disclosure Improvements—Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative in October, 2023. The standard modifies the disclosure or presentation requirements of a variety of Topics in the Codification. As the Group is required to comply with the SEC’s existing disclosure requirements, the effective date for each amendment will be the effective date of the removal of the disclosure requirement from Regulation S-X or Regulation S-K, with early adoption prohibited.
The FASB issued Accounting Standards Update No. 2023-09 Income Taxes—Improvements to Income Tax Disclosures (Topic 740) in December, 2023. which will be effective for fiscal years beginning after December 15, 2024. The standard requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as information on income taxes paid.
The Group is currently evaluating the impact of these recent accounting pronouncements on the consolidated financial statements.
(aj)Translation into United States Dollars
The financial statements of the Group are stated in RMB. Translations of amounts from RMB into United States dollars are solely for the convenience of the reader and were calculated at the rate of US$1.00 = RMB7.0999, on December 29, 2023, as set forth in H.10 statistical release of the Federal Reserve Board. The translation is not intended to imply that the RMB amounts could have been, or could be, converted, realized or settled into United States dollars at that rate on December 31, 2023, or at any other rate.
3. Fair value of assets and liabilities
For a description of the fair value hierarchy and the Group’s fair value methodologies, see “ Note 2—Summary of Significant Accounting Policies”.
Financial Instruments Recorded at Fair Value on a Recurring Basis
The following tables present the fair value hierarchy for assets and liabilities measured at fair value on a recurring basis:
| | | | | | | | |
| | | | | | | | Balance at Fair |
| | Level 1 | | Level 2 | | Level 3 | | Value |
December 31, 2022 |
| (RMB) |
| (RMB) |
| (RMB) |
| (RMB) |
Assets | |
| |
| |
| |
|
Loans at fair value | | — | | — | | 120,279,612 | | 120,279,612 |
Financial investments | | — | | — | | 10,713,953 | | 10,713,953 |
Total assets | | — | | — | | 130,993,565 | | 130,993,565 |
Liabilities | | | | | | | | |
Payable to investors at fair value | | — | | — | | 141,288,810 | | 141,288,810 |
Financial guarantee derivative | | — | | — | | 107,890,394 | | 107,890,394 |
Total liabilities | | — | | — | | 249,179,204 | | 249,179,204 |
| | | | | | | | |
| | | | | | | | Balance at Fair |
| | Level 1 | | Level 2 | | Level 3 | | Value |
December 31, 2023 |
| (RMB) |
| (RMB) |
| (RMB) |
| (RMB) |
Assets | |
| |
| |
| |
|
Financial investments | | 56,181,082 | | — | | 367,765,216 | | 423,946,298 |
Total assets | | 56,181,082 | | — | | 367,765,216 | | 423,946,298 |
| | | | | | | | |
| | | | | | | | Balance at Fair |
| | Level 1 | | Level 2 | | Level 3 | | Value |
December 31, 2023 |
| (US$) |
| (US$) |
| (US$) |
| (US$) |
Assets | |
| |
| |
| |
|
Financial investments | | 7,912,940 | | — | | 51,798,648 | | 59,711,588 |
Total assets | | 7,912,940 | | — | | 51,798,648 | | 59,711,588 |
F-44
Financial guarantee derivative
The Group uses the discounted cash flow model to value the financial guarantee derivatives. Net cumulative expected loss rates represent expected loss rate and prepayment rate at inception, as significant unobservable inputs applied in the discounted cash flow model, which ranged from 5.19% to 10.48% and nil for the year ended December 31, 2022 and 2023, respectively.
The following table sets forth the asset side of Group’s financial guarantee derivative movement activities for the years ended December 31, 2022.
| | | | | | |
|
| For loans facilitated in |
| For loans facilitated in |
| |
|
| 2021 |
| 2022 |
| Total |
Year ended December 31, 2022 | | RMB | | RMB |
| RMB |
Balance at December 31, 2021 |
| (11,816,799) | | — | | (11,816,799) |
Estimated payment to financial institutional cooperators based on the pre-agreed Cap (1) |
| — | | — | | — |
Less: Initially estimated net guarantee service fee to be collected (2) |
| — | | — | | — |
Add : Subsequent changes in estimated net guarantee service fee to be collected for outstanding loans (3) |
| (15,743,564) | | — | | (15,743,564) |
Change in fair value of financial guarantee derivative |
| (15,743,564) | | — | | (15,743,564) |
Add: Guarantee service fee received from borrowers |
| 110,656,100 | | — | | 110,656,100 |
Less: Compensation paid to financial institutional cooperators |
| 83,095,737 | | — | | 83,095,737 |
Balance at December 31, 2022 |
| — | | — | | — |
Potential maximum undiscounted amount payable (Remaining estimated payment to financial institutional cooperators based on the pre-agreed Cap at December 31, 2022) |
| — | | — | | — |
Changes in fair value related to balance outstanding at December 31, 2022 |
| — | | — | | — |
Note:
F-45
The following table sets forth the liability side of Group’s financial guarantee derivative movement activities for the years ended December 31, 2022 and 2023.
| | | | | | |
| | For loans facilitated in | | For loans facilitated in | | |
|
| 2021 |
| 2022 | | Total |
Year ended December 31, 2022 |
| RMB |
| RMB |
| RMB |
Balance at December 31, 2021 | | 565,953,269 | | — | | 565,953,269 |
Estimated payment to financial institutional cooperators based on the pre-agreed Cap(1) | | — | | 100,633,097 | | 100,633,097 |
Less: Initially estimated net guarantee service fee to be collected(2) | | — | | 93,954,209 | | 93,954,209 |
Add : Subsequent changes in estimated net guarantee service fee to be collected for outstanding loans(3) | | (129,190,421) | | 601,001 | | (128,589,420) |
Change in fair value of financial guarantee derivative | | (129,190,421) | | 7,279,889 | | (121,910,532) |
Add: Guarantee service fee received from borrowers | | 646,183,355 | | 107,060,087 | | 753,243,442 |
Less: Compensation paid to financial institutional cooperators | | 998,298,062 | | 6,449,582 | | 1,004,747,644 |
Less: Compensation payable to financial institutional cooperators (4) | | 84,648,141 | | — | | 84,648,141 |
Balance at December 31, 2022 | | — | | 107,890,394 | | 107,890,394 |
Potential maximum undiscounted amount payable (Remaining estimated payment to financial institutional cooperators based on the pre-agreed Cap at December 31, 2022) | | — | | 94,183,515 | | 94,183,515 |
Changes in fair value related to balance outstanding at December 31, 2022 | | — | | 4,719,727 | | 4,719,727 |
| | | | | | | | |
|
| For loans facilitated in |
| For loans facilitated in |
|
|
|
|
| | 2022 | | 2023 | | Total | | Total |
Year ended December 31, 2023 | | RMB | | RMB | | RMB | | USD |
Balance at December 31, 2022 |
| 107,890,394 | | — | | 107,890,394 | | 15,196,044 |
Estimated payment to financial institutional cooperators based on the pre-agreed Cap (1) |
| — | | — | | — | | — |
Less: Initially estimated net guarantee service fee to be collected (2) |
| — | | — | | — | | — |
Add : Subsequent changes in estimated net guarantee service fee to be collected for outstanding loans (3) |
| (24,966,242) | | — | | (24,966,242) | | (3,516,422) |
Change in fair value of financial guarantee derivative |
| (24,966,242) | | — | | (24,966,242) | | (3,516,422) |
Add: Guarantee service fee received from borrowers |
| 10,965,160 | | — | | 10,965,160 | | 1,544,411 |
Less: Compensation paid to financial institutional cooperators |
| 93,889,312 | | — | | 93,889,312 | | 13,224,033 |
Less: Compensation payable to financial institutional cooperators (4) | | — | | — | | — | | — |
Balance at December 31, 2023 |
| — | | — | | — | | — |
Potential maximum undiscounted amount payable (Remaining estimated payment to financial institutional cooperators based on the pre-agreed Cap at December 31, 2023) |
| — | | — | | — | | — |
Changes in fair value related to balance outstanding at December 31, 2023 |
| — | | — | | — | | — |
Note:
F-46
The change in fair value of financial guarantee derivative primarily relates the Group’s estimated exposure in relation to the loans newly facilitated during the corresponding period, as the Group is obligated to compensate financial institutional cooperators under the guarantee arrangement based on the contractual guarantee fees charged to borrowers across the entire portfolio subject to a pre-agreed Cap rather than the actual guarantee fees collected from the borrowers. The change in fair value amount equals to the sum of (i) the portion of amounts obligated to pay to financial institutional cooperators that are not expected to be collected from the borrowers due to the estimated default or prepayment and (ii) fair value gain realized as a result of the release of guarantee obligations. The derivative is increased by the guarantee fees collected from the borrowers upon receipt as the Group expects all the fees to be ultimately paid to financial institutional cooperators. When the payments are made to financial institutional cooperators, the derivative is reduced by the corresponding amount. The total loan products related to guarantee derivatives facilitated during the years ended December 31, 2022 and 2023 were RMB2,167,354,119 and nil, respectively.
As of December 31, 2021, financial guarantee derivatives related to certain financial institutional cooperators has an asset position of RMB11,816,799 respectively, primarily due to the time lag between the payments to those financial institutional cooperators and the collection of monthly guarantee service fees from borrowers. As of December 31, 2021, the cumulative monthly guarantee service fees collected from borrowers was less than the cumulative amount paid to those financial institutional cooperators. However, the total amount paid to those financial institutional cooperators was still within the pre-agreed Cap. The excess had been expected to be fully collected from the borrowers during the remaining term of the underlying loans. As of December 31, 2022 and 2023, financial guarantee derivatives related to certain financial institutional cooperators has a liability position of and RMB107,890,394 and nil. As of December 31, 2022 and 2023, the maximum potential undiscounted future payment the Group would be required to make is RMB94,183,515 and nil which also reflects the maximum potential payment to financial institutional cooperators based on the pre-agreed Cap.
The following table represents the outstanding loan balance, remaining weighted average contractual term and estimated net cumulative expected loss rates of the outstanding loans as of December 31, 2022 and 2023, respectively.
| | | | | | | |
| | As of |
| As of |
| As of |
|
| | December 31, |
| December 31, |
| December 31, |
|
|
| 2022 |
| 2023 |
| 2023 |
|
| | RMB | | RMB | | US$ | |
Outstanding loan balance | | 1,405,147,876 | | — | | — | |
Remaining weighted average contractual term (Month) | | 1.93 | | — | | — | |
Net cumulative expected loss rates (1) | | 7.23 | % | — | | — | |
| (1) | Represent the net of loss rate and prepayment rate. |
Loans at fair value and Payable to investors at fair value
The Group has elected the fair value option for the loan assets and liabilities of the Consolidated Trusts that formed before December 31, 2021, which otherwise would not have been carried at fair value. Such election is irrevocable and is applied to financial instruments on an individual basis at initial recognition.
As the Group’s loans and payable to investors in the Consolidated Trusts do not trade in an active market with readily observable prices, the Group uses significant unobservable inputs to measure the fair value of these assets and liabilities. Financial instruments are categorized in the Level 3 valuation hierarchy based on the significance of unobservable factors in the overall fair value measurement. At December 31, 2022 and 2023, the discounted cash flow methodology is used to estimate the fair value of loans and payables to investors.
F-47
As of December 31, 2022 and 2023, the significant unobservable inputs used in the fair value measurement of the loans and payables to investors of the Consolidated Trusts included the discount rate and net cumulative expected loss. These inputs in isolation can cause significant increases or decreases in fair value. Increases or decrease in the discount rate can significantly impact the fair value results. The discount rate is determined based on the market rates.
Significant Unobservable Inputs
| | | | | | | |
| | | | December 31, 2022 |
| December 31, 2023 |
|
| | | | Range of Inputs | | Range of Inputs |
|
Financial Instrument |
| Unobservable Input |
| Weighted-Average |
| Weighted-Average |
|
Loans and payable to investors at fair value | | Discount rates | | 6.48 | % | 6.48 | % |
| | Net cumulative expected loss rates (1) | | 5.94 | % | 6.10 | % |
| (1) | Represents the net of loss rate and prepayment rate, expressed as a percentage of the loan volume. |
The following table presents additional information about Level 3 loans and payable to investors measured at fair value on a recurring basis for the years ended December 31, 2022 and 2023. Changes in fair value of loans and payable to investors are reported net as “Fair value adjustments related to Consolidated Trusts” in the consolidated statements of comprehensive income(loss).
RMB
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Changes in fair |
| | | | | | | | | | | | | | value related to |
| | | | | | | | | | | | | | balance |
| | Balance at | | Origination | | | | | | | | Balance at | | outstanding at |
| | December 31, | | of loan | | Collection of | | Reinvestment | | Change in | | December | | December 31, |
|
| 2021 |
| principal |
| principal |
| of principal |
| fair value |
| 31, 2022 |
| 2022 |
Xiaoying Credit Loan | | 389,679,352 | | 99,000,000 | | (1,089,274,133) | | 727,042,700 | | (6,168,307) | | 120,279,612 | | (8,403,261) |
RMB
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Changes in fair |
| | | | | | | | | | | | | | value related to |
| | | | | | | | | | | | | | balance |
| | Balance at | | Origination | | | | | | | | Balance at | | outstanding at |
| | December 31, | | of loan | | Collection of | | Reinvestment | | Change in | | December | | December 31, |
|
| 2022 |
| principal |
| principal |
| of principal |
| fair value |
| 31, 2023 |
| 2023 |
Xiaoying Credit Loan | | 120,279,612 | | — | | (189,752,419) | | 70,004,009 | | (531,202) | | — | | — |
USD
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Changes in fair |
| | | | | | | | | | | | | | value related to |
| | | | | | | | | | | | | | balance |
| | Balance at | | Origination | | | | | | | | Balance at | | outstanding at |
| | December 31, | | of loan | | Collection of | | Reinvestment | | Change in | | December | | December 31, |
|
| 2022 |
| principal |
| principal |
| of principal |
| fair value |
| 31, 2023 |
| 2023 |
Xiaoying Credit Loan | | 16,941,029 | | — | | (26,726,069) | | 9,859,858 | | (74,818) | | — | | — |
F-48
| | |
| | Payable to investors at |
| | fair value of the |
| | Consolidated Trusts |
|
| RMB |
Balance at December 31, 2021 | | 462,714,400 |
Initial contribution | | 98,800,000 |
Principal payment | | (420,225,590) |
Changes in fair value | | — |
Balance at December 31, 2022 | | 141,288,810 |
Changes in fair value related to balance outstanding at December 31, 2022 | | — |
| | | | | |
| | Payable to investors at fair value of the | | ||
| | Consolidated Trusts | | ||
|
| RMB |
| US$ | |
Balance at December 31, 2022 | | 141,288,810 | | 19,900,113 | |
Initial contribution | | — | | — | |
Principal payment | | (141,288,810) | | (19,900,113) | |
Changes in fair value | | — | | — | |
Balance at December 31, 2023 | | — | | — | |
Changes in fair value related to balance outstanding at December 31, 2023 | | — | | — | |
The unpaid balance of loans at fair value as of December 31, 2022 and 2023 were RMB128,682,873 and nil. The difference between the aggregate fair value and unpaid principal balance for loans at fair value is primarily attributable to the credit risk associated with the loan collections and time value of money, amounted to RMB8,403,261 and nil as of December 31, 2022 and 2023, respectively.
The unpaid balance of payable to investors as of December 31, 2022 and 2023 were RMB141,288,810 and nil . The difference between the aggregate fair value and unpaid principal balance for payable to investors at fair value is primarily due to the time value of money, amounted nil and nil respectively as of December 31, 2022 and 2023.
The difference between the aggregate fair value and unpaid principal balance for both loans at fair value and payable to investors at fair value was recorded in “Fair value adjustments related to Consolidated Trusts” in the consolidated statements of comprehensive income(loss).
Financial investments
Financial investment measured at fair value represents the investment in two VC fund, which are open-ended funds with most underlying investments measured at fair value, in wealth management products, whose fair value provided by bank, and in US Treasury securities with unadjusted quoted price at Level 1 valuation hierarchy. The Group uses the statement with approximate fair value of the VC funds and of the wealth management products to measure fair value of the investment, which is categorized in the level 3 valuation hierarchy.
Financial Instruments Not Recorded at Fair Value
Financial instruments, including cash and cash equivalents, accounts receivable and contract assets, other payable and short-term borrowings. The carrying values of cash and cash equivalents, accounts receivable and contract assets, other payable and short-term borrowings approximate their fair value reported in the consolidated balance sheets due to the short-term nature of these assets and liabilities.
F-49
4. Prepaid expenses and other current assets
Prepaid expenses and other current assets consist of the following:
| | | | | | |
| | As of | | | ||
| | December 31, | | As of December 31, | ||
|
| 2022 |
| 2023 |
| 2023 |
| | RMB | | RMB | | US$ |
Prepaid expenses(1) | | 22,102,763 | | 8,424,956 | | 1,186,630 |
Input VAT to be deducted | | 20,676,758 | | 24,549,816 | | 3,457,769 |
Interest receivable of Consolidated Trusts | | 1,839,865 | | — | | — |
Dividend receivable(2) | | 15,000,000 | | — | | — |
Advance to employee | | 410,339 | | 86,431 | | 12,174 |
Others | | 11,052,616 | | 15,706,784 | | 2,212,254 |
Total prepaid expenses and other current assets | | 71,082,341 | | 48,767,987 | | 6,868,827 |
| (1) | Prepaid expenses mainly relate to prepaid service fee to the Group’s service providers. |
| (2) | The amount represents dividend receivable from the nominal shareholder of Jiangxi Ruijing. |
5. Deposits to institutional cooperators, net
The following table presents the deposits to cooperators as of December 31, 2022 and 2023, respectively:
| | | | | | |
| | As of | | | | |
| | December 31, | | As of December 31, | ||
| | 2022 | | 2023 | | 2023 |
|
| RMB |
| RMB |
| US$ |
Deposits to cooperators |
| 1,773,640,000 | | 1,705,121,413 | | 240,161,328 |
Provision for credit losses on deposits to institutional cooperators |
| (3,322,575) | | (2,649,017) | | (373,106) |
Deposits to cooperators, net |
| 1,770,317,425 | | 1,702,472,396 | | 239,788,222 |
Deposits to cooperators relate to the pledged cash to the Group’s financial institutional cooperators and the amount of deposit is separately agreed with each institutional cooperator.
As of 31 December 2022 and 2023, the allowance for credit losses of deposits to cooperators was RMB3,322,575 and RMB2,649,017 (US$373,106), respectively.
The following table presents the movement of the provision for deposits to institutional cooperators:
| | | | | | | | |
|
|
|
| Provision for |
|
|
|
|
| | As of | | credit losses on | | Charge-off for | | As of |
| | December 31, | | deposits to | | deposits to | | December 31, |
| | 2021 | | institutional cooperators | | institutional cooperators | | 2022 |
| | RMB | | RMB | | RMB | | RMB |
Deposits to institutional cooperators |
| 2,026,696 | | 1,295,879 | | — | | 3,322,575 |
| | | | | | | | |
|
| |
| Reversal of provision for |
| |
| |
| | As of | | credit losses on | | Charge-off for | | As of |
| | December 31, | | deposits to | | deposits to | | December 31, |
| | 2022 | | institutional cooperators | | institutional cooperators | | 2023 |
| | RMB | | RMB | | RMB | | RMB |
Deposits to institutional cooperators |
| 3,322,575 | | (673,558) | | — | | 2,649,017 |
| | | | | | | | |
|
| |
| Reversal of provision for |
| |
| |
| | As of | | credit losses on | | Charge-off for | | As of |
| | December 31, | | deposits to | | deposits to | | December 31, |
| | 2022 | | institutional cooperators | | institutional cooperators | | 2023 |
| | US$ | | US$ | | US$ | | US$ |
Deposits to institutional cooperators |
| 467,975 | | (94,869) | | — | | 373,106 |
F-50
6. Property and equipment, net
Property and equipment, net consists of the following:
| | | | | | |
| | As of | | | | |
| | December 31, | | As of December 31, | ||
|
| 2022 |
| 2023 |
| 2023 |
| | RMB | | RMB | | US$ |
Computer and transmission equipment | | 22,569,837 | | 25,295,660 | | 3,562,819 |
Furniture and office equipment | | 2,820,000 | | 543,160 | | 76,502 |
Leasehold improvements | | 23,707,764 | | 24,306,234 | | 3,423,461 |
Motor vehicles | | 816,103 | | 816,103 | | 114,946 |
Total property and equipment | | 49,913,704 | | 50,961,157 | | 7,177,728 |
Accumulated depreciation | | (44,052,344) | | (42,318,765) | | (5,960,473) |
Property and equipment, net | | 5,861,360 | | 8,642,392 | | 1,217,255 |
Depreciation expense was RMB6,215,253, RMB4,393,055 and RMB3,026,574 (US$426,284) for the years ended December 31, 2021, 2022 and 2023, respectively. Disposal of property and equipment resulted in gains of RMB180,537, RMB2,678 and in loss of RMB148,198 (US$20,873) in the year ended December 31, 2021, 2022 and 2023, respectively.
7. Intangible assets, net
Intangible assets, net consists of the following:
| | | | | | | | |
| | | | | | | | Weighted Average |
| | As of | | | | | | Remaining |
| | December 31, | | As of December 31, | | Amortization | ||
|
| 2022 |
| 2023 |
| 2023 |
| Period in Years |
| | RMB | | RMB | | US$ | | |
Licenses (1) | | 26,600,000 | | 26,600,000 | | 3,746,532 | | — |
Software and others | | 18,721,601 | | 21,216,094 | | 2,988,224 | | 5.83 |
Accumulated amortization | | (8,771,679) | | (11,005,710) | | (1,550,122) | | — |
Intangible assets, net | | 36,549,922 | | 36,810,384 | | 5,184,634 | | — |
Amortization expenses were RMB1,920,299, RMB2,253,257 and RMB2,234,031 (US$314,657) for the years ended December 31, 2021, 2022 and 2023 , respectively. The Group expects to record amortization expenses of RMB2,156,115 (US$303,682), RMB1,807,392 (US$254,566), RMB1,623,743 (US$228,699), RMB1,561,613 (US$219,949) and RMB1,420,468 (US$200,069) for the years ending December 31, 2024, 2025, 2026, 2027 and 2028 respectively.
8. Short - term borrowings
In 2022, the Group set up a one-year and a six-month unsecured loan amounting to RMB50,208,800 and RMB20,000,000, respectively.
In 2023, the Group set up several one-year unsecured loans and one-year secured loans, whose carrying amount were RMB265,000,000 and RMB300,000,000, respectively. The secured loans were pledged by the Group’s certain accounts receivables. The repayment terms of the secured loans include monthly interest payment and regular principal repayment. The secured loans are all one-year maturities and are due in 2024.
The weighted average interest rate for the outstanding short-term borrowings was approximately 5.71% and 6.35% per annum as of December 31, 2022 and 2023, respectively.
F-51
9. Financial investments
Investment in Dragonfly Ventures Ⅱ Feeder, L.P. and IOSG Fund II LP were both made in the year 2021 in the form of limited partnership at RMB63,726,000 and RMB19,117,800, respectively. Given the fact that the Group does have influence on those VC funds, the equity method of accounting was used. Given that there is generally a time lag of one quarter for the VC funds to provide the most recent financial statements, the Group used the VC funds’ financial statements as of September 30, 2022 and 2023 to process the equity method under ASC 323 for the year end December 31, 2022 and 2023, respectively. As of December 31, 2022 and 2023, there were no differences between the amount at which these VC funds were carried and the amount of the underlying equities in net assets.
VC funds measured at equity method
The table below summarizes the carrying value of investments in VC funds measured at equity method in the form of partnership measured at equity method as of December 31, 2022 and 2023:
| | | | | | | | |
|
| |
| As of |
| | ||
| |
| | December 31, | | As of December 31, | ||
| | Ownership | | 2022 | | 2023 |
| 2023 |
| | % | | RMB | | RMB | | US$ |
| | | | | | | | |
Investment in Dragonfly Ventures Ⅱ Feeder, L.P. |
| 5.73 | % | 94,890,623 | | 78,586,955 | | 11,068,741 |
Investment in IOSG Fund II LP |
| 3.00 | % | 26,075,024 | | 24,803,120 | | 3,493,446 |
Total |
|
|
| 120,965,647 | | 103,390,075 | | 14,562,187 |
The table below summarizes the combined financial information for the VC funds as above as of the nine months ended September 30, 2022 and 2023:
| | | | | | |
|
| As of September 30, |
| As of September 30, | ||
| | 2022 | | 2023 |
| 2023 |
| | RMB | | RMB | | US$ |
Assets: | | | | | | |
Cash and cash equivalents |
| 357,201,450 | | 207,486,569 | | 29,223,872 |
Investments |
| 2,128,097,512 | | 1,956,499,315 | | 275,567,165 |
Other current or non-current assets |
| 3,875,916 | | 4,315,717 | | 607,856 |
Total assets |
| 2,489,174,878 | | 2,168,301,601 | | 305,398,893 |
Liabilities: |
| | | | | |
Payable and accruals |
| 1,701,215 | | 2,001,575 | | 281,916 |
Investment payable |
| 2,461,245 | | — | | — |
Total liabilities |
| 4,162,460 | | 2,001,575 | | 281,916 |
| | | | | | |
|
| Nine months ended |
|
|
|
|
| | September 30, | | Nine months ended September 30, | ||
| | 2022 | | 2023 |
| 2023 |
| | RMB | | RMB | | US$ |
Net investment income |
| 24,930,729 | | (24,856,047) | | (3,500,901) |
Net realized gain on investments |
| 84,080,855 | | 14,582,478 | | 2,053,899 |
Net unrealized gain (loss) on investments |
| (1,520,805,915) | | (50,420,352) | | (7,101,558) |
Net income (loss) |
| (1,162,642,437) | | (40,043,826) | | (5,640,055) |
VC funds measured at cost minus impairment
During the year ended December 31, 2022 and 2023, the Group invested in two VC funds, in the form of partnership and zero coupon convertible note. These VC funds were measured at cost minus impairment because readily determinable fair value is not available. Other than impairment, there was no any upward adjustment, redemption nor disposal of investment of the VC funds. And the Group did not become aware of any observable price changes accounted for.
F-52
The table below summarizes investments measured at cost minus impairment, plus or minus observable price changes from orderly transactions of identical or similar investments of the same issuer as of December 31, 2022 and 2023:
| | | | | | |
|
| As of December 31, | | As of December 31, | ||
| | 2022 |
| 2023 |
| 2023 |
| | RMB | | RMB |
| US$ |
Opening balance | | — | | 60,940,250 | | 8,583,255 |
Contribution |
| 69,646,000 | | 18,747,966 | | 2,640,596 |
Impairment | | (8,874,750) | | — | | — |
Exchange differences | | 169,000 | | 1,173,660 | | 165,307 |
Ending Balance |
| 60,940,250 | | 80,861,876 | | 11,389,158 |
VC funds measured at fair value
During the year ended December 31, 2022, the Group invested in one VC fund in the form of partnership. The investment was measured at fair value. During the year ended December 31, 2023, the Group entered into a withdrawal letter to withdraw all of its limited partnership interest from the VC fund and, subsequently, entered into a switch request agreement to reinvest its net withdrawal proceeds to another VC fund in form of partnership. The transactions did not result in cash receipts or cash payments. During the year ended December 31, 2022 and 2023, the Group recognised fair value with respect to RMB9,525,822 of adverse change and RMB6,497,518 (US$915,156) of favorable change respectively as “Income (loss) from financial investments” in consolidated statements of comprehensive income.
The table below summarizes investments in VC funds in the form of partnership measured at fair value as of December 31, 2022 and 2023:
| | | | | | |
|
| As of December 31, | | As of December 31, | ||
| | 2022 |
| 2023 |
| 2023 |
| | RMB | | RMB |
| US$ |
Opening balance |
| — | | 10,713,953 | | 1,509,029 |
Contribution |
| 20,893,800 | | — | | — |
Switch in | | — | | 13,968,313 | | 1,967,396 |
Switch out | | — | | (14,342,134) | | (2,020,047) |
Fair value adjustment |
| (9,525,822) | | 6,497,518 | | 915,156 |
Exchange differences |
| (654,025) | | 389,979 | | 54,927 |
Ending Balance |
| 10,713,953 | | 17,227,629 | | 2,426,461 |
financial investments accounted under AFS model
During the year ended December 31, 2023, the Group invested RMB55,401,446 (US$7,803,130) of U.S. Treasury bill with original maturities over three months, and RMB350,000,000 (US$49,296,469) of wealth management products which is no fixed term and redeemable on demand and in which other than insignificant risk of underlying assets was incorporated, consigned by banks. Given its intention and abilities, the Group accounts these investments under available-for-sale model. The Group measure wealth management product in accordance with statements provided by the bank due to lack of quoted prices on an active market. As of December 31, 2023, no allowance for credit losses was recognized for the investments in wealth management products since fair value is greater than amortized cost. As of December 31, 2023, no allowance for credit losses was recognized for the investments in US Treasury securities since the quoted price of US Treasury securities does not show a downward trend subsequently till the date of the most recent statement of financial position. Also, the unrealized loss recognized for US Treasury securities was immaterial and, thus, the Group decided not to record in profit or loss.
The Group recognized realized gains of US Treasury securities as “Interest income (expenses), net” in consolidated statements of comprehensive income and, for the investments accounted under AFS, recognized unrealized gains or losses as “Income from financial investments” in other comprehensive income.
F-53
The table below summarizes investments measured under available-for-sale model as of December 31, 2023:
| | | | | | | | | | | | |
|
| Fair value | | |
| Total unrealized gains |
| Total |
| Fair value |
| Amortized cost |
| | As of December 31, | | Additions | | (losses) accumulated in | | realized | | As of December 31, | | As of December 31, |
| | 2022 |
| during the year |
| other comprehensive income |
| gains | | 2023 | | 2023 |
| | RMB | | RMB | | RMB | | RMB | | RMB | | RMB |
US Treasury securities with original maturities over three months | | — | | 55,401,446 | | (62,795) | | 842,431 | | 56,181,082 | | 56,243,877 |
Wealth management products with no fixed term | | — | | 350,000,000 | | 537,587 | | — | | 350,537,587 | | 350,000,000 |
Total | | — | | 405,401,446 | | 474,792 | | 842,431 | | 406,718,669 | | 406,243,877 |
| | | | | | | | | | | | |
|
| | | |
| Total unrealized |
| | | |
| |
| | Fair value | | | | gains (losses) accumulated | | | | Fair value | | Amortized cost |
| | As of December 31, | | Additions | | in other comprehensive | | Total realized | | As of December 31, | | As of December 31, |
| | 2022 |
| during the year |
| income |
| gains |
| 2023 |
| 2023 |
|
| US$ | | US$ | | US$ | | US$ | | US$ | | US$ |
US Treasury securities with original maturities over three months |
| — | | 7,803,130 |
| (8,844) |
| 118,654 | | 7,912,940 |
| 7,921,784 |
Wealth management products with no fixed term |
| — | | 49,296,469 |
| 75,718 |
| — | | 49,372,187 |
| 49,296,469 |
Total |
| — | | 57,099,599 |
| 66,874 |
| 118,654 | | 57,285,127 |
| 57,218,253 |
10. Long-term investments
During the year ended December 31, 2018, the Group invested RMB225,000,000 in cash for 15% equity interest of Jiangxi Ruijing Financial Asset Management Co., Ltd. (‘‘Jiangxi Ruijing’’), a Chinese Mainland based asset management company through a nominee arrangement where the Group obtained all shareholder rights associated with the 15% equity holdings through contractual agreements with the nominal shareholder. Given that the Group has the ability to significantly influence Jiangxi Ruijing, the equity method of accounting was used. As of December 31, 2022, the Group recognized dividend receivable of RMB15,000,000, which has been subsequently collected in 2023, from the nominal shareholder of Jiangxi Ruijing.
F-54
During the year ended December 31, 2020, the Group invested RMB3,500,000 in cash for 20% equity interest of Shenzhen Zuopeng Digital Technology Co., Ltd., a Chinese Mainland based digital system service company, whereas the Group obtained less than 17% of the voting power of the investee. Given that the Group does not have the ability to exercise significant influence over investments, the Group measure it at cost minus impairment because readily determinable fair value is not available. During the year ended December 31, 2022, the Group disposed all of its beneficial interest at cost and further received an investment income of RMB425,843 from the investee.
During the year ended December 31, 2021, the Group invested RMB315,000,000 in cash for 45% equity interest of Shenyang Tianxinhao Technology Limited, a Chinese Mainland based software and information technology services company. As stated in the shareholder agreement, the historical assets (which refer to assets other than equity of Newup Bank of Liaoning, same below), claims or debts and other actual or potential profits or losses, which are generated before the closing date or after the closing date but attributable to reasons before the closing date, as descried in the agreement, shall be enjoyed and borne by the original shareholder, the Group will not bear any historical assets, claims or debts set forth. The significant influence can be given by the Group as the Group has its representation on the board and thus equity method was applied. The difference between the amount at which the long-term investment was carried and the amount of the underlying equities in net assets amounting to RMB48,074,531 and RMB1,303,096 as of December 31, 2022 and 2023, respectively. The Group impaired the investment amounting to RMB26,865,733 and RMB46,771,435 during the year of 2022 and 2023 and considered that such impairment is other than temporary.
The following table presents the summary combined financial information for the investee companies as of and for the years ended December 31, 2022 and 2023.
| | | | | | |
|
| As of December 31, |
| As of December 31, | ||
| | 2022 | | 2023 | | 2023 |
|
| RMB |
| RMB |
| US$ |
Assets: | |
| |
| |
|
Cash and cash equivalents | | 274,926,779 | | 156,369,105 | | 22,024,128 |
Financial investments |
| 2,952,624,941 | | 5,313,961,988 | | 748,455,892 |
Prepaid expenses and other current assets, net |
| 454,270,439 | | 466,272,257 | | 65,673,074 |
Long-term investments |
| 416,823,932 | | 527,245,707 | | 74,261,005 |
Other non-current assets |
| 1,845,308,140 | | 1,560,057,412 | | 219,729,491 |
Total assets |
| 5,943,954,231 | | 8,023,906,469 | | 1,130,143,590 |
Liabilities: |
| | | | | |
Short-term borrowings |
| 38,711,000 | | — | | — |
Accrued expenses and other current liabilities |
| 2,772,708,125 | | 4,406,921,935 | | 620,701,973 |
Long-term borrowings |
| 926,420,194 | | 1,014,200,000 | | 142,847,082 |
Other non-current liabilities |
| 1,376,249 | | 1,258,733 | | 177,289 |
Total liabilities |
| 3,739,215,568 | | 5,422,380,668 | | 763,726,344 |
| | | | | | |
| | Year ended |
| | | |
|
| December 31, |
| Year ended December 31, | ||
| | 2022 | | 2023 | | 2023 |
| | RMB | | RMB | | US$ |
Net revenues | | 336,391,921 | | 383,611,655 | | 54,030,572 |
Net (loss) income |
| (170,276,127) | | 193,845,592 | | 27,302,581 |
F-55
11. Accrued expenses and other current liabilities
Accrued expenses and other current liabilities consist of the following:
| | | | | | |
| | As of | | | | |
| | December 31, | | As of December 31, | ||
|
| 2022 |
| 2023 |
| 2023 |
| | RMB | | RMB | | US$ |
Fund attributable to institutional funding partners (1) | | 46,633,508 | | 76,559,633 | | 10,783,199 |
Accrued interest payable of Consolidated Trusts | | 12,268,000 | | 37,714,338 | | 5,311,953 |
Professional fee payable | | 33,280,944 | | 38,682,222 | | 5,448,277 |
Commission fee payable (2) | | 182,821,417 | | 142,115,583 | | 20,016,561 |
Compensation payable to financial institutional cooperators | | 84,648,141 | | — | | — |
Transaction cost payable (3) | | 58,223,896 | | 138,894,109 | | 19,562,826 |
Receipts in advance | | 27,557,372 | | 73,188,645 | | 10,308,405 |
Insurance fee payable (4) | | 340,282 | | 7,800,344 | | 1,098,655 |
Lease liabilities | | 11,304,693 | | 12,852,494 | | 1,810,236 |
Other accrued expenses | | 18,956,280 | | 47,919,895 | | 6,749,377 |
Total accrued expenses and other current liabilities | | 476,034,533 | | 575,727,263 | | 81,089,489 |
12. Guarantee liabilities
The following table sets forth the activities of the Group’s obligations associated with the deferred guarantee income, originated from guarantee service commenced for the year ended December 31, 2023.
| | | | | | | | |
|
| As of |
| Fair value |
| |
| As of |
| | January 1, | | of deferred guarantee income | | Release of | | December 31, |
| | 2023 | | at inception of new loans | | deferred guarantee income | | 2023 |
Xiaoying Credit Loan (RMB) |
| — |
| 72,160,875 |
| (25,563,732) |
| 46,597,143 |
Xiaoying Credit Loan (USD) |
| — |
| 10,163,647 |
| (3,600,577) |
| 6,563,070 |
F-56
The movement of guarantee liabilities originated from guarantee services prior to September 2017 during the years ended December 31, 2021 and 2022 are as follows:
RMB
| | | | | | | | | | |
| | | | | | | | Reversal of | | |
|
| As of |
| |
| | | provision for |
| As of |
| | January 1, | | | | Released on | | contingent | | December 31, |
|
| 2021 |
| Net payout(1) | | expiration |
| liability |
| 2021 |
Xiaoying Credit Loan |
| 5,139,742 |
| 7,821,975 |
| (12,961,717) | | — |
| — |
Internet Channel |
| 4,649,884 |
| (4,625,600) |
| — | | (24,284) |
| — |
Total |
| 9,789,626 |
| 3,196,375 |
| (12,961,717) | | (24,284) | | — |
RMB
| | | | | | | | | | |
| | | | | | | | Reversal of | | |
| | As of | | | | | | provision for | | As of |
| | January 1, | | | | Released on | | contingent | | December 31, |
|
| 2022 |
| Net payout(1) |
| expiration |
| liability |
| 2022 |
Xiaoying Credit Loan | | — | | 2,011,850 | | (2,011,850) | | — | | — |
Internet Channel | | — | | 14,000,000 | | — | | (14,000,000) | | — |
Total | | — | | 16,011,850 | | (2,011,850) | | (14,000,000) | | — |
The movement of guarantee liabilities originated from guarantee services commenced in and after 2023 are as follows:
RMB
| | | | | | | | |
| | | | | | | | |
| | As of | | | | Provision for | | As of |
| | January 1, | | | | contingent | | December 31, |
|
| 2023 |
| Net payout(1) | | liability |
| 2023 |
Xiaoying Credit Loan | | — | | (5,613,471) | | 67,519,980 | | 61,906,509 |
USD
| | | | | | | | |
| | | | | | | | |
| | As of | | | | Provision for | | As of |
| | January 1, | | | | contingent | | December 31, |
|
| 2023 |
| Net payout (1) | | liability |
| 2023 |
Xiaoying Credit Loan | | — | | (790,641) | | 9,509,990 | | 8,719,349 |
The maximum potential undiscounted future payment was nil and RMB667,733,409 (US$94,048,284) as of December 31, 2022 and 2023.
13. Related party balances and transactions
In 2019, the Group purchased earnings rights of two loans from Jiangxi Ruijing. The considerations paid amounted to RMB100,000,000 and RMB280,000,000, respectively, which equal to the principal amounts of the underlying loans. In 2020, earnings right of the former loan had been fully repaid. Earnings right of the latter loan had been partially repaid by RMB20,000,000 and RMB160,000,000 in 2020 and 2021, respectively, and the remaining RMB100,000,000 had been fully repaid in January 2022. The associated interest income amounted to RMB17,269,246 and RMB412,341 in 2021 and 2022, respectively.
As of December 31, 2021 and 2022, the Group recognized dividend receivable of RMB15,000,000,which has been subsequently collected in 2023, from the nominal shareholder of Jiangxi Ruijing, the nominal shareholder is controlled by Mr. Yue (Justin) Tang.
F-57
In 2021, the Group entered into agreements with a financing guarantee company, which is a wholly-owned subsidiary of the Group’s equity investee obtained in 2020 and disposed in 2022. Following the disposal, it no longer constitutes a related party to the Group. This financing guarantee company provides guarantee service for an identified portfolio of loans the Group facilitated and charges borrowers a guarantee fee, a portion of which will be subsequently paid to the Group as the service fee for the intermediary service the Group provided. During the year of 2021 and 2022, this financing guarantee company provided guarantee service for 5.9% and 29.6% of the total loans the Group facilitated and provided. The Group recognized total net revenue of RMB78,801,582 and RMB542,719,679 during the years of 2021 and 2022 in connection with the service fees of facilitation service for loans that covered by this financing guarantee company. As of December 31, 2021 and 2022, accounts receivable and contract assets balance amounted to RMB66,761,250 and RMB313,992,225, respectively.
In 2021, the Group provided a loan of RMB150,000,000 to an associate of the Group, Shenyang Tianxinhao Technology Limited, and the monthly interest rate applied is 0.5%. The loan had been fully repaid during the year of 2021. The associated interest income amounted to RMB750,000 in 2021.
In 2022, the Group entered into agreements with Newup Bank of Liaoning (“Newup Bank”), according to which the Group charged service fees directly from Newup Bank for the intermediary service the Group provided. The Group recognized total net revenue of RMB13,100,669 and RMB11,370,044 (US$1,601,437) during the year of 2022 and 2023 in connection with the service fees of facilitation service for loans. Accounts receivable and contract assets amounted to RMB13,886,710 and RMB1,096,251 (US$154,404) with respect to December 31, 2022 and December 31, 2023.
The Group believes that the terms of the transactions with the related parties are comparable to the terms of arm’s‑length transactions with third parties.
14. Income taxes
Cayman Islands
X Financial is a company incorporated in the Cayman Islands. Under the current laws of the Cayman Islands, the Company is not subject to tax on either income or capital gain.
Hong Kong
Under the current Hong Kong Inland Revenue Ordinance, YZT (HK) Limited and YX (HK) Limited, subsidiaries of the Group located in Hong Kong, are subject to 16.5% income tax on their taxable income generated from operations in Hong Kong. No income tax expenses for these entities have been recognized in the consolidated financial statements as they have no assessable income for the years ended December 31, 2021, 2022 and 2023.
Chinese Mainland
Under the Law of the PRC on Enterprise Income Tax (the “EIT Law”), the Company’s subsidiaries, VIEs and subsdiaries of the VIEs established in the Chinese Mainland are subject to an income tax rate of 25% for the years presented. One of the subsidiaries of the Group in Shenzhen was a qualified enterprise eligible to enjoy the preferential income tax rate of 15% from 2020 to 2022 and renewed its qualification until 2025. One VIE and one subsidiary of the Group operated in a specific preferential tax jurisdiction and were thereby eligible to be levied at the reduced income tax rate of 15% from 2020 to 2025 and from 2023 to 2025, respectively.
F-58
Uncertainties exist with respect to how the current income tax law in the Chinese Mainland applies to the Group’s overall operations, and more specifically, with regard to its tax residency status. The EIT Law includes a provision specifying that legal entities organized outside of the Chinese Mainland will be considered residents for Chinese Income Tax purposes if the place of effective management or control is within the Chinese Mainland. The implementation rules to the EIT Law provide that non-resident legal entities will be considered Chinese Mainland residents if substantial and overall management and control over the manufacturing and business operations, personnel, accounting and properties, occurs within the Chinese Mainland. Despite the present uncertainties resulting from the limited Chinese Mainland tax guidance on the issue, the Group does not believe that the legal entities organized outside of the Chinese Mainland within the Group should be treated as residents for EIT Law purposes and, therefore, has not recorded an unrecognized tax benefit for this tax position. If the Chinese Mainland tax authorities subsequently determine that the Company and its subsidiaries registered outside the Chinese Mainland should be deemed resident enterprises, the Company and its subsidiaries registered outside the Chinese Mainland will be subject to Chinese Mainland income taxes, at a statutory income tax rate of 25%.
According to PRC Administration of the Levy and Collection of Taxes Law, the statute of limitations is three years if an underpayment of taxes is due to computational errors made by the taxpayer or withholding agent. The statute of limitations will be extended five years under special circumstances, which are not clearly defined (but an underpayment of tax liability exceeding RMB0.1 million is specifically listed as a special circumstance). In the case of a related party transaction, the statute of limitations is ten years. There is no statute of limitations in the case of tax evasion. Tax years from 2015 to the current years for the Group’s Chinese Mainland subsidiaries are subject to examination of the Chinese Mainland tax authorities.
Current tax expense (benefit) and deferred tax expense (benefit), which are substantially all for Chinese Mainland income taxes, are as follows:
| | | | | | | | |
| | Year ended | | Year ended | | | | |
| | December 31, | | December 31, | | Year ended December 31, | ||
|
| 2021 |
| 2022 |
| 2023 |
| 2023 |
| | RMB | | RMB | | RMB | | US$ |
Current tax expense (benefit) | | 35,315,597 | | 193,768,237 | | 278,695,689 | | 39,253,466 |
Deferred tax expense (benefit) | | 333,420,104 | | 195,589,376 | | (29,258,045) | | (4,120,909) |
Total income tax expense (benefit) | | 368,735,701 | | 389,357,613 | | 249,437,644 | | 35,132,557 |
Income (loss) before income taxes and gain (loss) from equity affiliates for different jurisdictions is shown as follows:
| | | | | | | | |
|
| Year ended | | Year ended | | | | |
| | December 31, | | December 31, | | Year ended December 31, | ||
|
| 2021 |
| 2022 |
| 2023 |
| 2023 |
| | RMB | | RMB | | RMB | | US$ |
Cayman Islands |
| (6,463,771) | | (5,585,777) | | (3,703,756) | | (521,663) |
Hong Kong entities |
| 948,973 | | 12,667,827 | | (17,584,906) | | (2,476,783) |
Chinese Mainland entities |
| 1,196,315,182 | | 1,216,374,240 | | 1,424,372,496 | | 200,618,670 |
Total |
| 1,190,800,384 | | 1,223,456,290 | | 1,403,083,834 | | 197,620,224 |
F-59
A reconciliation between income tax expense computed by applying the Chinese Mainland income tax rate of 25%, the income tax jurisdiction where the Group has substantially all of its operations, to income (loss) before income taxes and gain (loss) from equity in affiliates and the reported amount of income tax expense (benefit) is as follows:
| | | | | | | | |
| | Year ended | | Year ended | | | ||
| | December 31, | | December 31, | | Year ended December 31, | ||
|
| 2021 |
| 2022 |
| 2023 |
| 2023 |
| | RMB | | RMB | | RMB | | US$ |
Expected income tax at Chinese Mainland income tax rate | | 297,700,096 | | 305,864,072 | | 350,770,959 | | 49,405,056 |
Share based compensation expense not deductible for income tax purposes | | 22,108,693 | | 13,384,454 | | 10,649,553 | | 1,499,958 |
Other expenses not deductible for income tax purposes | | 24,325,078 | | 4,399,168 | | 916,343 | | 129,064 |
Effect of preferential tax rate(1) | | (25,716,398) | | (15,977,099) | | (134,240,494) | | (18,907,378) |
Effect of different tax rate of subsidiary operation in other jurisdictions | | 1,535,280 | | 319,679 | | 1,376,643 | | 193,896 |
Research and development tax deduction | | (14,040,027) | | (16,996,590) | | (20,676,415) | | (2,912,212) |
Unrecognized tax benefits for prior years’ transfer pricing arrangement | | (22,239,451) | | — | | — | | — |
Change in valuation allowance | | 99,384,200 | | 101,490,352 | | 11,432,693 | | 1,610,261 |
Income tax on subsidiary earnings | | — | | — | | 24,459,727 | | 3,445,080 |
Others | | (14,321,770) | | (3,126,423) | | 4,748,635 | | 668,832 |
Total | | 368,735,701 | | 389,357,613 | | 249,437,644 | | 35,132,557 |
| (1) | The aggregate amount and per share effect of the preferential tax rate are as follows: |
| | | | | | | | |
| | Year ended | | Year ended | | | | |
| | December 31, | | December 31, | | Year ended December 31, | ||
|
| 2021 |
| 2022 |
| 2023 |
| 2023 |
| | RMB | | RMB | | RMB | | US$ |
The aggregate amount income tax benefit (expense) of the preferential tax rate |
| 25,716,398 | | 15,977,099 | | 134,240,494 | | 18,907,378 |
The aggregate effect on basic and diluted net income per share: |
| | | | | | | |
—Basic |
| 0.08 | | 0.05 | | 0.47 | | 0.07 |
—Diluted |
| 0.08 | | 0.05 | | 0.46 | | 0.06 |
F-60
The tax effects of temporary differences and carry forwards that give rise to the deferred tax balances at December 31, 2022 and 2023 are as follows:
| | | | | | |
| | As of December 31, | | As of December 31, | ||
|
| 2022 |
| 2023 |
| 2023 |
| | RMB | | RMB | | US$ |
Deferred tax assets: | | | | | | |
Long-term investments | | 16,326,280 | | 24,473,436 | | 3,447,011 |
Accrued expenses | | 13,629,066 | | — | | — |
Advertising and market related expenses carryforwards (1) | | 15,428,899 | | 22,251,219 | | 3,134,019 |
Accounts receivable and contract assets | | 5,683,849 | | 7,123,587 | | 1,003,336 |
Guarantee liabilities | | — | | 16,879,995 | | 2,377,498 |
Financial guarantee derivatives | | 165,452,224 | | 159,210,663 | | 22,424,353 |
Loan receivable from Xiaoying Housing Loans | | 14,940,336 | | 13,887,028 | | 1,955,947 |
Loans receivable from Xiaoying Credit Loans and other loans | | 106,663,862 | | 166,027,798 | | 23,384,526 |
Operating loss carryforwards | | 45,784,681 | | 45,998,381 | | 6,478,736 |
Deposits to institutional cooperators | | 830,644 | | 662,254 | | 93,277 |
Others | | — | | 21,505 | | 3,029 |
Lease liabilities | | 16,004,767 | | 13,019,736 | | 1,833,791 |
Total deferred tax assets | | 400,744,608 | | 469,555,602 | | 66,135,523 |
Valuation allowance | | (214,884,582) | | (226,317,275) | | (31,876,121) |
Total deferred tax assets, net of valuation allowance | | 185,860,026 | | 243,238,327 | | 34,259,402 |
Deferred tax liabilities: | | | | | | |
Property and equipment | | 986,598 | | 1,678,634 | | 236,431 |
Long-term investments | | — | | 7,501,275 | | 1,056,532 |
Right-of-use assets | | 15,672,062 | | 12,657,331 | | 1,782,748 |
Investment in Consolidated Trusts | | 25,188,918 | | 36,643,382 | | 5,161,112 |
Investment in Consolidated Partnerships | | 56,305,689 | | 62,339,878 | | 8,780,388 |
Undistributed earnings | | — | | 16,500,000 | | 2,323,976 |
Total deferred tax liabilities | | 98,153,267 | | 137,320,500 | | 19,341,187 |
| (1) | Advertising and market related expenses carryforwards are those in excess of deduction limit, that can be carried forward indefinitely, arising from the operation of the Group’s Chinese Mainland subsidiaries, amounting to RMB61,715,596 and RMB89,004,878 (US$12,536,075) as of December 31, 2022 and 2023, respectively. Under Chinese Mainland tax rules, advertising and market related expenses that exceed the limit can be claimed and deducted in the following tax year. |
Movement of the valuation allowance is as follows:
| | | | | | | | |
| | As of | | As of | | |
| |
| | December 31, | | December 31, | | As of December 31, | ||
|
| 2021 |
| 2022 |
| 2023 |
| 2023 |
| | RMB | | RMB | | RMB |
| US$ |
Balance as of January 1 | | (14,010,030) | | (113,394,230) | | (214,884,582) | | (30,265,860) |
Addition | | (104,514,776) | | (101,665,571) | | (20,828,173) | | (2,933,587) |
Reductions | | 5,130,576 | | 175,219 | | 9,395,480 | | 1,323,326 |
Net change in the valuation allowance |
| (99,384,200) | | (101,490,352) | | (11,432,693) | | (1,610,261) |
Balance as of December 31 |
| (113,394,230) | | (214,884,582) | | (226,317,275) | | (31,876,121) |
The Company operates through its subsidiaries, VIEs and subsidiaries of the VIEs. The valuation allowance is considered on an individual entity basis.
As of December 31, 2022 and 2023, the Company had operating loss carryforwards of RMB221,205,324 and RMB227,566,693 (US$32,052,098) respectively from its subsidiaries, VIEs and subsidiaries of the VIEs registered in the Chinese Mainland. The net operating loss carryforwards will expire in years 2024 to 2028, if not utilized.
F-61
The tax benefit, net of valuation allowance, recognized during the years ended December 31, 2022 and 2023 due to the generation of net operating losses carryforwards that can be carried forward to future years amounted to RMB805,389 and RMB883,214 (US$124,398), respectively. The tax benefit realized during the year ended December 31, 2022 and 2023 from the utilization of carryforwards where the related deferred tax asset was offset by a valuation allowance amounted to RMB3,927,259 and RMB4,876,301 (US$686,813) respectively.
The tax benefit, net of valuation allowance, recognized during the years ended December 31, 2022 and 2023 due to generation of advertising and market related expenses carryforwards amounting to nil and RMB8,239,531 (US$1,160,514), respectively.
During the year ended December 31, 2022 and 2023, the Company recognized a deferred tax expense of RMB101,490,352 and RMB11,432,693(US$1,160,261) respectively for changes in a valuation allowance as a result of a change in judgment about the ability of a subsidiary to utilize a beginning-of-the-year deferred tax asset in future years.
The Group assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. The ultimate realization of deferred tax assets is dependent upon its ability to generate sufficient future taxable income within the carryforward periods provided for in the tax law and during the periods in which the temporary differences become deductible. When assessing the realization of deferred tax assets, the Group has considered possible sources of taxable income including (i) future reversals of existing taxable temporary differences, (ii) future taxable income exclusive of reversing temporary differences and carryforwards, including consideration of specific known trends of profits expected to be reflected within the industry, (iii) taxable income in prior carryback years and (iv) tax-planning strategies. On the basis of this evaluation, as of December 31, 2022 and 2023 a valuation allowance of RMB214,884,582 and RMB226,317,275(US$31,876,121) was recorded respectively to reduce the deferred tax assets to the amount that is not more likely than not to be realized. The amount of the deferred tax assets considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as the Group’s projections for growth.
In accordance with the EIT Law, dividends, which arise from profits of foreign invested enterprises (“FIEs”), are subject to a 10% withholding income tax. In addition, under tax treaty between the Chinese Mainland and Hong Kong, if the foreign investor is incorporated in Hong Kong and qualifies as the beneficial owner, the applicable withholding tax rate is reduced to 5%, if the investor holds at least 25% in the FIE. A deferred tax liability should be recognized for the undistributed profits of Chinese Mainland subsidiaries unless the Company has sufficient evidence to demonstrate that the undistributed dividends will be reinvested and the remittance of the dividends will be postponed indefinitely.
The Group constantly assesses its intent to reinvest the offshore earnings. As of December 31, 2023, the Group no longer intended to reinvest certain undistributed earnings of the FIEs that have been previously taxed in the Chinese Mainland, while for the remainder of the undistributed earnings, the Group intended to indefinitely reinvest. The Group has recorded a deferred tax liability of RMB16,500,000 (US$2,323,976) associated with the earnings that intend to repatriate in the future. The Group paid withholding tax of RMB7,959,727 (US$1,121,104) on distributed earnings during the year. For the earnings the Group intended to indefinitely reinvest, no deferred tax liabilities for withholding taxes have been recorded.
Undistributed earnings of FIEs that are considered to be indefinitely invested amounted to RMB3,070,106,819 on December 31, 2022 and RMB3,761,829,057 (US$529,842,541) on December 31, 2023. All undistributed earnings are still subject to certain taxes upon repatriation, primarily where withholding taxes apply. The related unrecognized deferred tax liabilities were RMB307,010,682 and RMB376,182,906 (US$52,984,254) at a 10% tax rate.
F-62
Unrecognized tax benefits
A roll-forward of unrecognized tax benefits is as follows:
| | | | | | | | |
| | Year ended December 31, | | Year ended December 31, | | Year ended December 31, | ||
|
| 2021 |
| 2022 |
| 2023 |
| 2023 |
| | RMB | | RMB | | RMB | | US$ |
Balance at beginning of the year |
| 159,483,176 | | 120,195,925 | | 259,386,286 | | 36,533,795 |
Additions for tax positions taken in current year |
| 100,672,568 | | 259,386,286 | | 262,052,034 | | 36,909,257 |
Reductions for tax positions taken in prior years | | (139,959,819) | | (110,342,989) | | (156,571,391) | | (22,052,620) |
Settlements | | — | | (9,852,936) | | — | | — |
Balance at end of the year |
| 120,195,925 | | 259,386,286 | | 364,866,929 | | 51,390,432 |
The accrued interest and penalties related to income taxes as of December 31, 2021, 2022 and 2023 is set forth below:
| | | | | | | | |
| | Year ended December 31, | | Year ended December 31, | | Year ended December 31, | ||
|
| 2021 | | 2022 |
| 2023 |
| 2023 |
| | RMB | | RMB | | RMB | | US$ |
Accrued interest and penalties | | 1,154,145 | | 2,000,970 | | 4,127,348 | | 581,325 |
As of December 31, 2021, 2022 and 2023, the Group’s unrecognized tax benefits consisted of: 1) RMB28,757,431, RMB2,349,049 and RMB50,384,562 (US$7,096,517) arising from charge-offs of loans receivable from Xiaoying Credit Loans and other loans and accounts receivable and contract asset; 2) RMB81,585,558, RMB257,037,237 and RMB314,482,367 (US$44,293,915) arising from difference in timing for including certain taxable income in tax return, of which RMB81,585,558 and RMB257,037,237 were omitted from prior years roll forward schedule; and 3) RMB9,852,936, nil and nil arising from prior years’ transfer pricing arrangement.
As of December 31, 2021, 2022 and 2023, nil, nil and RMB102,814,895 (US$14,481,175) of the unrecognized tax benefit balance, if recognized upon examination settlement or statute expiration, would affect the effective tax rate.
For the year ended December 31, 2021, the decrease of accrued interest and penalties related to income taxes was RMB10,731,479, which was recorded as part of the income tax expense in the consolidated financial statements. For the year ended December 31, 2022, the increase of accrued interest and penalties related to income taxes was RMB846,825, which was recorded as part of the income tax expense in the consolidated financial statements. For the year ended December 31, 2023, the increase of accrued interest and penalties related to income taxes was RMB2,126,378 (US$299,494), which was recorded as part of the income tax expense in the consolidated financial statements.
15. Net income (loss) per share and net income (loss) attributable to common stockholders
The following table details the computation of the basic and diluted net income (loss) per share:
| | | | | | | | |
| | Year ended | | Year ended | | | | |
| | December 31, | | December 31, | | Year ended December 31, | ||
|
| 2021 |
| 2022 |
| 2023 |
| 2023 |
| | RMB | | RMB | | RMB | | US$ |
Net income (loss) attributable to X Financial | | 825,407,023 | | 811,996,439 | | 1,186,793,974 | | 167,156,435 |
Shares (denominator): | | | | | | | | |
Weighted average number of ordinary shares used in computing basic EPS | | 329,230,273 | | 316,444,826 | | 288,115,969 | | 288,115,969 |
Basic net income (loss) per share | | 2.51 | | 2.57 | | 4.12 | | 0.58 |
Diluted effects of stock options and RSUs | | 7,650,809 | | 5,958,561 | | 2,717,245 | | 2,717,245 |
Weighted average number of ordinary shares used in computing diluted EPS | | 336,881,082 | | 322,403,387 | | 290,833,214 | | 290,833,214 |
Diluted net income (loss) per share | | 2.45 | | 2.52 | | 4.08 | | 0.57 |
F-63
Diluted income (loss) per share do not include the following instruments as their inclusion would have been anti-dilutive:
| | | | | | |
|
| Year ended |
| Year ended |
| Year ended |
|
| December 31, |
| December 31, |
| December 31, |
| | 2021 | | 2022 | | 2023 |
Stock options | | 32,139,614 | | 29,293,014 | | 3,602,998 |
Restricted stocks units | | 27,100,812 | | 21,398,126 | | 12,613,046 |
16. Share-based compensation
Share options
On January 25, 2015, the Board of Directors of X Financial approved the Share Incentive Plan for the purpose of providing incentives and rewards to employees and executives who contribute to the success of the Company’s operations, and granted 13,843,645 of stock options. On June 29, 2015, May 3, 2016, October 11, 2017, April 30, 2018, October 31, 2018 and April 30, 2019, the Board of Directors of X Financial granted 630,000, 7,425,000, 16,616,000, 841,054, 475,000 and 155,000 stock options respectively to certain employees, directors and officers. The stock options shall expire 10 years from the date of grant and vest over a period from three to four years.
On May 9, 2018, the Board of Directors of X Financial granted 40,000,000 share options to certain senior management. The exercise price was the offering price per share of the Group’s IPO which was US$4.75, and were eligible to vest, in whole or in part, when both the market capitalization milestone as well as the targeted adjusted net earnings were achieved subsequent to the IPO. The Company determined the service inception date to be May 9, 2018 and the grant date to be the date of the IPO.
On November 10, 2021, the board of directors of X Financial decided to cancel 9,429,984 of unvested share options granted to certain senior management.
The Company used the Binomial model to estimate the fair value of the options granted on the respective grant dates with assistance from independent valuation firms. The fair value per option was estimated at the date of grant using the assumptions. The weighted-average grant date fair value of the options for the years ended December 31,2021, 2022 and 2023 were RMB9.58, RMB9.87 and RMB10.39 per share respectively
| | | | | | | | | | | | | | | | | |
|
| January 25, |
| June 29, |
| May 3, |
| October 11, |
| April 30, |
| May 9, |
| October 31, |
| April 30, | |
|
| 2015 |
| 2015 |
| 2016 |
| 2017 |
| 2018 |
| 2018 |
| 2018 |
| 2019 | |
| | RMB | | RMB | | RMB | | RMB |
| RMB | | RMB | | RMB |
| RMB | |
Fair value of underlying ordinary shares | | 4.91 | | 9.66 |
| 16.98 | | 30.29 | | 41.33 |
| 38.14 | | 26.74 | | 16.65 | |
Exercise Price | | 0.27 | | 0.27 |
| 0.27 - 10.71 | | 0.27 - 27.02 | | 25.42 |
| 30.27 | | 27.93 | | 31.96 | |
Expected Volatility per annum (“p.a.”) | | 43.00 | % | 38.00 | % | 42.00 | % | 38.60 | % | 45.47 | % | 39.3 | % | 43.90 | % | 30.15 | % |
Risk-Free Rate (p.a.) | | 1.81 | % | 2.33 | % | 1.81 | % | 2.35 | % | 2.96 | % | 2.94 | % | 3.15 | % | 2.97 | % |
Exercise Multiple | | 2.5 | | 2.5 | | 2.5 | | 2.5 | | 2.5 | | 5.58-38.33 | | 2.5 | | NIL | |
Dividend Yield (p.a.) | | NIL | | NIL | | NIL | | NIL | | NIL | | NIL | | NIL | | NIL | |
Time to Maturity (Years) | | 10 | | 10 | | 10 | | 10 | | 10 | | 5 | | 10 | | 10 | |
The risk-free rate of interest is based on the yield curve of government bonds in the Chinese Mainland as of valuation date. The expected volatility is estimated based on annualized standard deviation of daily stock price return of comparable companies for the period before valuation date and with similar span as the expected expiration term. Prior to the IPO, the fair value of the ordinary shares was through a retrospective valuation as at each grant date, which used management’s best estimate for projected cash flows as of the valuation date with the assistance of an independent third-party appraiser. Subsequent to the IPO, the fair value of ordinary shares was determined by observable market price.
F-64
A summary of option activity during the year ended December 31, 2023 is presented below:
| | | | | | | | |
|
| |
| |
| |
| Intrinsic |
| | | | | | | | value of |
| | Number of | | Exercise Price | | Remaining | | options |
|
| Options |
| RMB |
| Contractual |
| RMB |
Outstanding, as of January 1, 2023 | | 35,778,331 | | 0.27-31.96 | | 2.07-6.33 | | 20,744,096 |
Granted | | — | | — | | — | | — |
Exercised | | 3,890,490 | | 0.27 | | — | | — |
Forfeited/Cancelled | | 25,690,016 | | 10.71-30.27 | | — | | — |
Outstanding, as of December 31, 2023 | | 6,197,825 | | 0.27-31.96 | | 1.06-5.33 | | 10,639,290 |
Vested and expected to vest as of December 31, 2023 | | 6,197,825 | | 0.27-31.96 | | 1.06-5.33 | | 10,639,290 |
Exercisable as of December 31, 2023 | | 6,197,825 | | 0.27-31.96 | | 1.06-5.33 | | 10,639,290 |
The Group recognized the compensation cost for the stock options on a straight-line basis.
For the years ended December 31, 2021, 2022 and 2023 the Group recorded compensation expenses of RMB71,849,299, RMB10,740,648 and RMB414,747 (US$58,415) respectively for the stock options granted to the Group’s employees. The Group allocated share-based compensation expense for share option as follows:
| | | | | | | | |
| | Year ended | | Year ended | | | | |
| | December 31, | | December 31, | | Year ended December 31, | ||
|
| 2021 |
| 2022 |
| 2023 |
| 2023 |
| | RMB | | RMB | | RMB | | US$ |
Origination and servicing | | 21,345,909 | | 905,756 | | 70,740 | | 9,963 |
General and administrative | | 48,655,490 | | 9,340,416 | | 344,007 | | 48,452 |
Sales and marketing | | 1,847,900 | | 494,476 | | — | | — |
As of December 31, 2021 and 2022, there were RMB11,094,017 and RMB619,557 respectively of total unrecognized compensation expense related to unvested stock options granted. All compensation expense related to unvested stock options was recognized by the end of December 31, 2023.
There were no income tax benefits recognized for the year ended December 31, 2021, 2022 and 2023 for share options.
Restricted stocks unit
On April 15, 2019, the Board of Directors of X Financial granted 150,000 of restricted stock units to certain directors. The restricted stock units shall vest over a period from two to three years. The restricted stock units have no expiration period. On November 20, 2019, the Board of Directors of X Financial granted 1,789,400 of restricted stock units to certain employees. On January 21, April 30, October 31, 2020, the Board of Directors of X Financial granted 4,600,000, 673,300 and 550,000 of restricted stock units to certain employees, respectively. The restricted stocks shall expire 10 years from the date of grant and vest over a period from three to four years. On November 10, 2021, the Board of Directors of X Financial granted 26,657,998 of restricted stock units to certain senior managements and employees. The restricted stock units shall expire 10 years from the date of grant and vest over a period from three to four years. On March 3, 2022, the Board of Directors of X Financial granted 810,000 restricted stock units to certain directors. The restricted stock units shall vest over a period of three years. On December 1, 2023, the Board of Directors of X Financial granted 180,000 restricted stock units to certain directors. The restricted stock units shall vest over a period of three years.
On August 13, 2019 and November 20, 2019, the Board of Directors decided to cancel 1,500,000 and 250,000 of unvested options of certain senior managements and concurrently granted 1,500,000 and 250,000 of restricted stock units as replacement awards to the senior managements. The incremental compensation expenses of RMB360,592 (US$52,281) was equal to the excess of the fair value of the modified award immediately after the modification over the fair value of the original award immediately before the modification.
F-65
A summary of restricted share units activity during the year ended December 31, 2023 is presented below:
| | | | |
| | | | Weighted-Average Grant-Date |
| | Number of | | Fair Value |
|
| Restricted Shares |
| RMB |
Outstanding, as of January 1, 2023 | | 21,906,453 | | 4.96 |
Granted | | 180,000 | | 5.05 |
Vested | | 7,783,466 | | 4.97 |
Forfeited | | 387,344 | | 5.02 |
Outstanding, as of December 31, 2023 | | 13,915,643 | | 4.95 |
For the year ended December 31, 2021, 2022 and 2023 , the Group recorded compensation expenses of RMB16,585,473, RMB42,797,167 and RMB42,183,463 (US$5,941,417) respectively for the restricted shares granted to the Group’s directors and employees. The Group allocated share-based compensation expense for restricted share as follows:
| | | | | | | | |
| | Year ended | | Year ended | | | | |
| | December 31, | | December 31, | | Year ended December 31, | ||
|
| 2021 |
| 2022 |
| 2023 |
| 2023 |
| | RMB | | RMB | | RMB | | US$ |
Origination and servicing |
| 10,819,642 | | 26,040,888 | | 25,396,830 | | 3,577,069 |
General and administrative |
| 5,321,620 | | 16,743,484 | | 16,617,520 | | 2,340,529 |
Sales and marketing |
| 444,211 | | 12,795 | | 169,113 | | 23,819 |
As of December 31, 2021, 2022 and 2023 , there was RMB141,127,667, RMB102,650,058 and RMB61,832,598 (US$8,708,939) respectively of total unrecognized compensation expense related to unvested restricted shares granted. As of December 31, 2023, the cost is expected to be recognized over a weighted-average period of 1.86 years.
There were no income tax benefits recognized for the year ended December 31, 2021, 2022 and 2023 for restricted stocks unit.
17. Statutory reserves and restricted net assets
The Company’s ability to pay dividends is primarily dependent on the Company receiving distributions of funds from its subsidiaries. Relevant Chinese Mainland statutory laws and regulations permit payments of dividends by the VIEs and subsidiaries of the VIEs incorporated in Chinese Mainland only out of their retained earnings, if any, as determined in accordance with Chinese Mainland accounting standards and regulations. The consolidated results of operations reflected in the consolidated financial statements prepared in accordance with U.S. GAAP differ from those reflected in the statutory financial statements of the Company’s subsidiaries.
Under Chinese Mainland law, the Company’s subsidiaries, VIEs and the subsidiaries of the VIEs located in the Chinese Mainland (collectively referred as the “Chinese Mainland entities”) are required to provide for certain statutory reserves, namely a general reserve, an enterprise expansion fund and a staff welfare and bonus fund. The Chinese Mainland entities are required to allocate at least 10% of their after tax profits on an individual company basis as determined under Chinese Mainland accounting standards to the statutory reserve and has the right to discontinue allocations to the statutory reserve if such reserve has reached 50% of registered capital on an individual company basis. In addition, the registered capital of the Chinese Mainland entities is also restricted.
Amounts restricted that include paid-in capital, additional paid-in capital and statutory reserve funds, as determined pursuant to China Accounting Standard, are RMB4,644,526,736 and RMB5,517,847,025 (US$777,172,499) as of December 31, 2022 and 2023 respectively
18. Commitments and contingencies
Operating lease as lessee
As disclosed in Note 2, the Group has adopted ASC Topic 842 on 1 January, 2019. Current and non-current portions of lease liabilities have been recorded as “Accrued expenses and other current liabilities” and “Other non-current liabilities” in the balance sheet as at December 31, 2022 and 2023, except for short-term leases.
F-66
Financial investments
In 2022, the Group committed to invest US$10,000,000 in a VC fund. In 2023, the Group committed to increase its subscribed capital contribution in the VC fund.As of December 31, 2023, the Group’s remaining subscribed capital contribution was US$2,555,605 which has been paid as of the date of this annual report.
Short-term borrowings
As of December 31, 2023, the Group had short-term borrowings amounting to RMB565,000,000, such borrowings will be repaid with interests amounting to RMB26,770,972 in 2024. Interest payments are calculated using the interest rate as of December 31, 2023.
Contingencies
The Group is subject to periodic legal or administrative proceedings in the ordinary course of business. The Group does not have any pending legal or administrative proceeding to which the Group is a party that will have a material effect on its business or financial condition.
19. Subsequent events
In first quarter of 2024, the Group has set up several one-year loans in aggregation to RMB49,500,000, which apply fixed rate at 4.5%.
F-67
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
BALANCE SHEETS
(in Renminbi “RMB”, except share and per share data)
| | | | | | |
| | As of | | | | |
| | December 31, | | As of December 31, | ||
|
| 2022 |
| 2023 |
| 2023 |
| | RMB | | RMB | | US$ |
Assets: | | | | | | |
Cash and cash equivalents | | 14,280,138 | | 1,202,355 | | 169,348 |
Prepaid expenses and other current assets | | 426,398 | | 410,826 | | 57,863 |
Amount due from subsidiaries and VIEs | | 1,024,111,805 | | 1,047,722,447 | | 147,568,620 |
Investments in subsidiaries and VIEs | | 3,717,374,302 | | 4,857,619,732 | | 684,181,430 |
Total assets | | 4,756,192,643 | | 5,906,955,360 | | 831,977,261 |
| | | | | | |
Liabilities: | | | | | | |
Accrued expenses and other current liabilities | | 2,937,951 | | 604,989 | | 85,212 |
Dividend payable | | — | | 59,226,084 | | 8,341,819 |
Total liabilities | | 2,937,951 | | 59,831,073 | | 8,427,031 |
| | | | | | |
Equity: | | | | | | |
Common shares | | 206,793 | | 206,793 | | 29,126 |
Treasury stock | | (124,596,781) | | (111,520,291) | | (15,707,305) |
Additional paid-in capital | | 3,191,193,773 | | 3,196,942,284 | | 450,279,902 |
Retained earnings | | 1,622,852,316 | | 2,692,018,850 | | 379,162,925 |
Accumulated other comprehensive income | | 63,598,591 | | 69,476,651 | | 9,785,582 |
Total equity | | 4,753,254,692 | | 5,847,124,287 | | 823,550,230 |
Total liabilities and equity | | 4,756,192,643 | | 5,906,955,360 | | 831,977,261 |
F-68
CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in Renminbi “RMB”, except share and per share data)
| | | | | | | | |
| | Year ended | | Year ended | | | | |
| | December 31, | | December 31, | | Year ended December 31, | ||
|
| 2021 |
| 2022 |
| 2023 |
| 2023 |
| | RMB | | RMB | | RMB | | US$ |
General and administrative expenses | | (9,577,576) | | (8,739,084) | | (5,899,484) | | (830,925) |
Interest income | | 590 | | 1,518 | | 29,662 | | 4,178 |
Equity in profit of subsidiaries and VIEs | | 831,870,794 | | 817,582,216 | | 1,190,497,730 | | 167,678,098 |
Other income, net | | 3,113,215 | | 3,151,789 | | 2,166,066 | | 305,084 |
Net income | | 825,407,023 | | 811,996,439 | | 1,186,793,974 | | 167,156,435 |
Other comprehensive (loss) income | | (14,749,519) | | 57,289,037 | | 5,878,060 | | 827,907 |
Comprehensive income | | 810,657,504 | | 869,285,476 | | 1,192,672,034 | | 167,984,342 |
F-69
CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
STATEMENT OF CASH FLOWS
(in Renminbi “RMB”, except share and per share data)
| | | | | | | | |
| | Year ended | | Year ended | | | | |
| | December 31, | | December 31, | | Year ended December 31, | ||
|
| 2021 |
| 2022 |
| 2023 |
| 2023 |
| | RMB | | RMB | | RMB | | US$ |
Net cash used in operating activities | | (8,630,238) | | (9,559,741) | | (5,736,205) | | (807,928) |
Received from subsidiaries and VIEs | | 4,545,040 | | 164,707,863 | | 25,363,652 | | 3,572,396 |
Dividends received from subsidiaries | | — | | — | | 49,338,235 | | 6,949,145 |
Net cash provided by investing activities | | 4,545,040 | | 164,707,863 | | 74,701,887 | | 10,521,541 |
Contribution from shareholders | | 2,959,511 | | 277,342 | | 1,099,619 | | 154,878 |
Repurchase of common shares | | — | | (146,740,902) | | (24,872,828) | | (3,503,265) |
Dividend paid | | — | | — | | (58,401,356) | | (8,225,659) |
Net cash provided by (used in) financing activities | | 2,959,511 | | (146,463,560) | | (82,174,565) | | (11,574,046) |
Effect of foreign exchange rate changes | | (144,484) | | 824,099 | | 131,100 | | 18,466 |
Net increase (decrease) in cash and cash equivalents | | (1,270,171) | | 9,508,661 | | (13,077,783) | | (1,841,967) |
Cash and cash equivalents, beginning of year | | 6,041,648 | | 4,771,477 | | 14,280,138 | | 2,011,315 |
Cash and cash equivalents, end of year | | 4,771,477 | | 14,280,138 | | 1,202,355 | | 169,348 |
F-70
SCHEDULE I—NOTES TO CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
F-71
